Engelhard Corporation 10-Q 9-30-2005
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
T
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|
|
|
SECURITIES
EXCHANGE ACT OF 1934
|
|
For
the
quarterly period ended September 30, 2005
OR
*
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|
|
|
SECURITIES
EXCHANGE ACT OF 1934
|
|
For
the
transition period from ________ to _________
Commission
file number 1-8142
ENGELHARD
CORPORATION
(Exact
name of Registrant as specified in its charter)
DELAWARE
|
|
22-1586002
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer Identification No.)
|
101
WOOD AVENUE, ISELIN, NEW JERSEY, 08830
(Address
of principal executive offices)
(732)
205-5000
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Rule
12b-2 of the Exchange Act).
Indicate
by checkmark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act).
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
Class
of Common Stock
|
|
Outstanding
at October 31, 2005
|
$1
par value
|
|
119,906,559
|
PART
I - FINANCIAL INFORMATION
Item
1.
|
Financial
Statements
|
ENGELHARD
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF EARNINGS
(Thousands,
except per-share data)
(Unaudited)
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Net
sales
|
|
$
|
1,208,258
|
|
$
|
995,451
|
|
$
|
3,325,181
|
|
$
|
3,125,849
|
|
Cost
of sales
|
|
|
1,033,676
|
|
|
825,800
|
|
|
2,796,445
|
|
|
2,627,067
|
|
Gross
profit
|
|
|
174,582
|
|
|
169,651
|
|
|
528,736
|
|
|
498,782
|
|
Selling,
administrative and other expenses
|
|
|
103,865
|
|
|
94,846
|
|
|
307,737
|
|
|
285,204
|
|
Operating
earnings
|
|
|
70,717
|
|
|
74,805
|
|
|
220,999
|
|
|
213,578
|
|
Equity
in earnings of affiliates
|
|
|
8,695
|
|
|
6,087
|
|
|
24,237
|
|
|
19,390
|
|
Gain/(loss)
on investments
|
|
|
(12
|
)
|
|
-
|
|
|
168
|
|
|
-
|
|
Interest
income
|
|
|
3,688
|
|
|
1,174
|
|
|
8,626
|
|
|
3,494
|
|
Interest
expense
|
|
|
(11,107
|
)
|
|
(5,127
|
)
|
|
(27,372
|
)
|
|
(16,915
|
)
|
Earnings
before income taxes
|
|
|
71,981
|
|
|
76,939
|
|
|
226,658
|
|
|
219,547
|
|
Income
tax expense
|
|
|
13,430
|
|
|
17,123
|
|
|
45,394
|
|
|
40,700
|
|
Income
from continuing operations
|
|
|
58,551
|
|
|
59,816
|
|
|
181,264
|
|
|
178,847
|
|
Loss
from discontinued operations, net of taxes
|
|
|
(42
|
)
|
|
(761
|
)
|
|
(6,905
|
)
|
|
(1,455
|
)
|
Net
earnings
|
|
$
|
58,509
|
|
$
|
59,055
|
|
$
|
174,359
|
|
$
|
177,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.49
|
|
$
|
0.49
|
|
$
|
1.50
|
|
$
|
1.45
|
|
Diluted
|
|
$
|
0.48
|
|
$
|
0.48
|
|
$
|
1.48
|
|
$
|
1.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.00
|
)
|
$
|
(0.01
|
)
|
$
|
(0.06
|
)
|
$
|
(0.01
|
)
|
Diluted
|
|
$
|
(0.00
|
)
|
$
|
(0.01
|
)
|
$
|
(0.06
|
)
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.49
|
|
$
|
0.48
|
|
$
|
1.45
|
|
$
|
1.44
|
|
Diluted
|
|
$
|
0.48
|
|
$
|
0.47
|
|
$
|
1.42
|
|
$
|
1.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends per share
|
|
$
|
0.12
|
|
$
|
0.11
|
|
$
|
0.36
|
|
$
|
0.33
|
|
Average
number of shares outstanding - basic
|
|
|
119,608
|
|
|
122,951
|
|
|
120,493
|
|
|
123,584
|
|
Average
number of shares outstanding - diluted
|
|
|
121,554
|
|
|
125,150
|
|
|
122,547
|
|
|
125,829
|
|
See
the
Accompanying Notes to the Unaudited Condensed Consolidated Financial
Statements
ENGELHARD
CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Thousands)
(Unaudited)
|
|
September
30,
2005
|
|
December
31,
2004
|
|
Cash
|
|
$
|
29,538
|
|
$
|
126,229
|
|
Receivables,
net
|
|
|
500,218
|
|
|
406,962
|
|
Committed
metal positions
|
|
|
687,037
|
|
|
457,498
|
|
Inventories
|
|
|
530,437
|
|
|
458,020
|
|
Other
current assets
|
|
|
134,342
|
|
|
135,468
|
|
Total
current assets
|
|
|
1,881,572
|
|
|
1,584,177
|
|
Investments
|
|
|
197,862
|
|
|
179,160
|
|
Property,
plant and equipment, net
|
|
|
913,018
|
|
|
902,751
|
|
Goodwill
|
|
|
418,596
|
|
|
330,798
|
|
Other
intangible and noncurrent assets
|
|
|
212,845
|
|
|
181,706
|
|
Total
assets
|
|
$
|
3,623,893
|
|
$
|
3,178,592
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
$
|
207,588
|
|
$
|
12,025
|
|
Accounts
payable
|
|
|
398,156
|
|
|
375,343
|
|
Hedged
metal obligations
|
|
|
543,101
|
|
|
292,880
|
|
Other
current liabilities
|
|
|
285,010
|
|
|
248,411
|
|
Total
current liabilities
|
|
|
1,433,855
|
|
|
928,659
|
|
Long-term
debt
|
|
|
437,596
|
|
|
513,680
|
|
Other
noncurrent liabilities
|
|
|
306,503
|
|
|
321,940
|
|
Shareholders’
equity
|
|
|
1,445,939
|
|
|
1,414,313
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
3,623,893
|
|
$
|
3,178,592
|
|
See
the
Accompanying Notes to the Unaudited Condensed Consolidated Financial
Statements
ENGELHARD
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
(Unaudited)
|
|
Nine
Months Ended
September
30,
|
|
|
|
2005
|
|
2004
|
|
Cash
flows from operating activities
|
|
|
|
|
|
Net
earnings from continuing activities
|
|
$
|
181,264
|
|
$
|
178,847
|
|
Adjustments
to reconcile net earnings to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and depletion
|
|
|
93,538
|
|
|
92,785
|
|
Amortization
of intangible assets
|
|
|
3,440
|
|
|
2,767
|
|
Equity
results, net of dividends
|
|
|
(13,369
|
)
|
|
(4,608
|
)
|
Net
change in assets and liabilities:
|
|
|
|
|
|
|
|
Materials
Services related
|
|
|
(29,938
|
)
|
|
(47,961
|
)
|
All
other
|
|
|
(98,058
|
)
|
|
(51,948
|
)
|
Net
cash provided by operating activities
|
|
|
136,877
|
|
|
169,882
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(85,334
|
)
|
|
(76,335
|
)
|
Proceeds
from investments
|
|
|
-
|
|
|
1,988
|
|
Acquisitions
and other investments, net of cash acquired of $16,023
|
|
|
(159,303
|
)
|
|
(66,240
|
)
|
Net
cash used in investing activities
|
|
|
(244,637
|
)
|
|
(140,587
|
)
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
Increase
(decrease) in short-term borrowings
|
|
|
74,732
|
|
|
(54,326
|
)
|
Proceeds
from long-term debt
|
|
|
49,469
|
|
|
108,972
|
|
Purchase
of treasury stock
|
|
|
(91,366
|
)
|
|
(107,586
|
)
|
Cash
from exercise of stock options
|
|
|
7,009
|
|
|
22,433
|
|
Dividends
paid
|
|
|
(43,444
|
)
|
|
(40,819
|
)
|
Net
cash used in financing activities
|
|
|
(3,600
|
)
|
|
(71,326
|
)
|
Effect
of exchange rate changes on cash
|
|
|
14,669
|
|
|
(2,498
|
)
|
Net
decrease in cash
|
|
|
(96,691
|
)
|
|
(44,529
|
)
|
Cash
at beginning of year
|
|
|
126,229
|
|
|
87,889
|
|
Cash
at end of period
|
|
$
|
29,538
|
|
$
|
43,360
|
|
See
the
Accompanying Notes to the Unaudited Condensed Consolidated Financial
Statements
ENGELHARD
CORPORATION
BUSINESS
SEGMENT INFORMATION
(Thousands)
(Unaudited)
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Net
Sales
|
|
|
|
|
|
|
|
|
|
Environmental
Technologies
|
|
$
|
254,701
|
|
$
|
213,432
|
|
$
|
738,416
|
|
$
|
667,901
|
|
Process
Technologies
|
|
|
167,012
|
|
|
147,776
|
|
|
487,554
|
|
|
439,209
|
|
Appearance
and Performance Technologies
|
|
|
188,223
|
|
|
172,187
|
|
|
548,692
|
|
|
523,719
|
|
Technology
segments
|
|
|
609,936
|
|
|
533,395
|
|
|
1,774,662
|
|
|
1,630,829
|
|
Materials
Services
|
|
|
578,436
|
|
|
446,606
|
|
|
1,501,528
|
|
|
1,453,627
|
|
All
Other
|
|
|
19,886
|
|
|
15,450
|
|
|
48,991
|
|
|
41,393
|
|
Total
net sales
|
|
$
|
1,208,258
|
|
$
|
995,451
|
|
$
|
3,325,181
|
|
$
|
3,125,849
|
|
Operating
Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental
Technologies
|
|
$
|
33,345
|
|
$
|
33,976
|
|
$
|
108,327
|
|
$
|
104,256
|
|
Process
Technologies
|
|
|
23,270
|
|
|
20,723
|
|
|
65,633
|
|
|
60,085
|
|
Appearance
and Performance Technologies
|
|
|
16,952
|
|
|
19,264
|
|
|
55,499
|
|
|
58,121
|
|
Technology
segments
|
|
|
73,567
|
|
|
73,963
|
|
|
229,459
|
|
|
222,462
|
|
Materials
Services
|
|
|
5,800
|
|
|
6,657
|
|
|
16,706
|
|
|
13,361
|
|
All
Other
|
|
|
(8,650
|
)
|
|
(5,815
|
)
|
|
(25,166
|
)
|
|
(22,245
|
)
|
Total
operating earnings
|
|
|
70,717
|
|
|
74,805
|
|
|
220,999
|
|
|
213,578
|
|
Equity
in earnings of affiliates
|
|
|
8,695
|
|
|
6,087
|
|
|
24,237
|
|
|
19,390
|
|
Gain/(loss)
on investments
|
|
|
(12
|
)
|
|
-
|
|
|
168
|
|
|
-
|
|
Interest
income
|
|
|
3,688
|
|
|
1,174
|
|
|
8,626
|
|
|
3,494
|
|
Interest
expense
|
|
|
(11,107
|
)
|
|
(5,127
|
)
|
|
(27,372
|
)
|
|
(16,915
|
)
|
Earnings
before income taxes
|
|
|
71,981
|
|
|
76,939
|
|
|
226,658
|
|
|
219,547
|
|
Income
tax expense
|
|
|
13,430
|
|
|
17,123
|
|
|
45,394
|
|
|
40,700
|
|
Income
from continuing operations
|
|
|
58,551
|
|
|
59,816
|
|
|
181,264
|
|
|
178,847
|
|
Loss
from discontinued operations, net of taxes
|
|
|
(42
|
)
|
|
(761
|
)
|
|
(6,905
|
)
|
|
(1,455
|
)
|
Net
earnings
|
|
$
|
58,509
|
|
$
|
59,055
|
|
$
|
174,359
|
|
$
|
177,392
|
|
See
the
Accompanying Notes to the Unaudited Condensed Consolidated Financial
Statements
Notes
to the Unaudited Condensed Consolidated Financial
Statements
Note
1 - Basis of Presentation
The
unaudited condensed consolidated financial statements of Engelhard Corporation
and subsidiaries (the “Company”) contain all adjustments, consisting only of
normal recurring adjustments, which, in the opinion of management, are necessary
for a fair presentation of the results for the interim periods presented. The
financial statement results for interim periods are not necessarily indicative
of financial results for the full year. These financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
included in the Company’s 2004 Form 10-K. The unaudited condensed consolidated
financial statements include the accounts of the Company and its subsidiaries.
All significant intercompany transactions and balances have been eliminated
in
consolidation.
Note
2 - Discontinued Operations
In
the
second quarter of 2005, the Company committed to a plan to discontinue
manufacturing operations at its Carteret, New Jersey facility, which
manufactured specialty precious metal products. Operations at the Carteret,
New
Jersey facility ceased in the third quarter. In accordance with SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company
has classified the results of this manufacturing operation as Discontinued
Operations in the accompanying Condensed Consolidated Statements of Earnings.
For the nine months ended September 30, 2005, the Company recorded charges
related to the discontinuance of operations at its Carteret facility of $10.3
million. These charges consist of $4.7 million related to severance and other
employee expenses, $3.2 million related to the impairment of machinery and
equipment, $1.3 million related to the impairment of goodwill, $1.8 million
related to work-in-process inventory not expected to be completed or sold and
$0.1 million of other expenses, offset by a third-quarter gain of $0.8 million
related to sale of assets. In the third quarter of 2005, the Company made
payments of approximately $2 million, resulting in a reserve provision balance
of $2.7 million at September 30, 2005.
The
above
impairment values are based upon management’s estimate of fair value. The amount
ultimately realized from the disposition of these assets is subject to change.
The Company expects to incur additional pre-tax expenses of approximately $1.2
million related to this action in the quarter ending December 31,
2005.
Net
sales
and operating losses from discontinued operations were as follows (in millions):
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Net
Sales
|
|
$
|
5.4
|
|
$
|
6.5
|
|
$
|
21.1
|
|
$
|
23.9
|
|
Operating
loss
|
|
|
(0.1
|
)
|
|
(1.2
|
)
|
|
(11.1
|
)
|
|
(2.3
|
)
|
The
assets and liabilities related to the Carteret manufacturing operation have
been
aggregated and included within “Other intangible and noncurrent assets” and
“Other noncurrent liabilities” in the accompanying Condensed Consolidated
Balance Sheets. An analysis of these assets and liabilities follows (in
millions):
|
|
September
30,
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
Receivables,
net
|
|
$
|
1.6
|
|
$
|
3.4
|
|
Inventories
|
|
|
-
|
|
|
1.7
|
|
Other
current assets
|
|
|
0.2
|
|
|
0.1
|
|
Property,
plant and equipment, net
|
|
|
4.6
|
|
|
8.3
|
|
Assets
from discontinued operations
|
|
$
|
6.4
|
|
$
|
13.5
|
|
|
|
September
30,
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
Accounts
payable
|
|
$
|
-
|
|
$
|
0.5
|
|
Accrued
expenses
|
|
|
1.6
|
|
|
0.5
|
|
Liabilities
from discontinued operations
|
|
$
|
1.6
|
|
$
|
1.0
|
|
Discontinued
Operations resulted in a cash source of $0.8 million for the nine months ended
September 30, 2005 and a cash use of $0.7 million for the nine months ended
September 30, 2004. These amounts are included in the “All other” line of the
accompanying Condensed Consolidated Statements of Cash Flows.
Note
3 - Acquisitions
In
September 2005, the Company acquired U.S.-based Almatis AC, Inc., formerly
the
adsorbents and catalyst business of Almatis Holdings 1.25 BV, for approximately
$65 million. Almatis AC, Inc. is a major developer and producer of alumina-based
adsorbents and purification catalysts for the natural gas, petrochemical,
compressed air and hydrogen peroxide markets. The acquisition strengthens the
Company’s leadership position in moisture control and purification for a variety
of industries around the world. It expands the Company’s technology portfolio to
include high-purity alumina products, catalyst supports and alumina-based
adsorbents and desiccants. The Company also acquired new production
capabilities, including two manufacturing facilities in Port Allen, LA and
Vidalia, LA. The results of operations of this acquisition, integrated into
the
Strategic Technologies group of the “All Other” category, are included in the
accompanying financial statements from the date of acquisition. A portion of
the
purchase price has been allocated to assets acquired based on their fair values,
while the remaining balance was recorded as goodwill. The Company is completing
its review and determination of these fair values, and thus the allocation
of
the purchase price is subject to revision. Pro forma information is not provided
as the impact of the acquisition does not have a material effect on the
Company’s results of operations, cash flow, or financial position.
In
June
2005, the Company acquired the syngas catalyst business of Nanjing Chemical
Industry Corporation (NCIC), a wholly owned subsidiary of SINOPEC, one of
China’s largest integrated energy and chemical companies, for approximately $20
million. As of June 30th,
the
Company has paid approximately 70% of the purchase price with the remaining
30%
recorded in accounts payable and expected to be paid within the next 12 months.
The Company acquired NCIC’s syngas business operations, catalyst technology and
Nanjing-based manufacturing assets. The acquisition supports the Company’s
growth strategy and broadens the competencies in surface and material sciences
as it expands the Company’s portfolio of served markets and applications. The
results of operations of this acquisition, integrated into the Process
Technologies segment, are included in the accompanying consolidated financial
statements from the date of acquisition. A portion of the purchase price has
been allocated to assets acquired based on their fair values, while the
remaining balance was recorded as goodwill. The Company is completing its review
and determination of these fair values, and thus the allocation of the purchase
price is subject to revision. Pro forma information is not provided as the
impact of the acquisition does not have a material effect on the Company’s
results of operations, cash flow, or financial position.
In
March
2005, the Company acquired a majority stake in Coletica, S.A., a French company
that develops performance-based, skin-care compounds and related technologies
for the cosmetic and personal care industry. The Company purchased 77.87% of
Coletica’s outstanding shares for approximately €50 million ($65 million). In
the second quarter of 2005, the Company made a tender offer and acquired the
remaining publicly held shares. The total purchase price of shares amounted
to
€65.5 million ($86 million) for 100% ownership. This acquisition further
strengthens the Company’s position as a leading global supplier of materials
technology to the cosmetic and personal care industries. Coletica has two
facilities in Lyon, France and sales offices in Paris, New York and Tokyo.
A
portion of the purchase price has been allocated to assets acquired based on
their fair values, while the remaining balance was recorded as goodwill. The
Company is completing its review and determination of these fair values, and
thus the allocation of the purchase price is subject to revision. Pro forma
information is not provided as the impact of the acquisition does not have
a
material effect on the Company’s results of operations, cash flows or financial
position.
During
the first quarter of 2005, the Company exchanged a 7.5% interest in its Chinese
automotive catalyst operations for approximately 2.6% of N.E. Chemcat (NECC),
a
publicly-traded joint venture. This transaction was recorded as an exchange
of
similar productive assets in accordance with APB 29, “Accounting for Nonmonetary
Transactions.” The Company also acquired an additional 0.7% of NECC through a
public tender offer. These transactions increase the Company’s ownership
percentage in NECC from 38.8% to 42.1%.
Note
4 - Accounting for Asset Retirement Obligations
The
Company’s asset retirement obligations primarily relate to kaolin mining
operations of its Appearance and Performance Technologies segment. In order
to
provide kaolin-based products to the Company’s customers and the Process
Technologies segment, the Company engages in kaolin mining operations. The
kaolin mining process includes exploration, topsoil and overburden removal,
extraction of kaolin and the subsequent reclamation of mined areas. The Company
has a legal obligation to reclaim mined areas under state
regulations.
The
following table represents the change in the Company’s asset retirement
obligation liability (in millions):
|
|
September
30,
2005
|
|
September
30,
2004
|
|
Balance
at beginning of year
|
|
$
|
10.8
|
|
$
|
10.5
|
|
Accretion
expense
|
|
|
0.5
|
|
|
0.5
|
|
Payments
|
|
|
(0.8
|
)
|
|
(0.9
|
)
|
Asset
retirement obligation at end of period
|
|
$
|
10.5
|
|
$
|
10.1
|
|
Note
5 - Inventories
Inventories
consist of the following (in millions):
|
|
September
30,
2005
|
|
December
31,
2004
|
|
Raw
materials
|
|
$
|
171.5
|
|
$
|
137.2
|
|
Work
in process
|
|
|
59.8
|
|
|
49.3
|
|
Finished
goods
|
|
|
283.0
|
|
|
253.8
|
|
Precious
metals
|
|
|
16.1
|
|
|
17.7
|
|
Total
inventories
|
|
$
|
530.4
|
|
$
|
458.0
|
|
The
majority of the Company’s physical metal is carried in the committed metal
positions line on the balance sheet at fair value with the remainder carried
in
the inventory line at historical cost. The inventory portion of precious metals
is stated at LIFO cost. The market value of the precious metals recorded at
LIFO
exceeded cost by $107.1 million and $70.8 million at September 30, 2005 and
December 31, 2004, respectively. Net earnings include after-tax gains of $1.5
million in each of the third quarter periods ended September 30, 2005 and 2004
from the sale of inventory accounted for under the LIFO method.
In
the
normal course of business, certain customers and suppliers deposit significant
quantities of precious metals with the Company under a variety of arrangements.
Equivalent quantities of precious metals are returnable as product or in other
forms. Metals held for the accounts of customers and suppliers are not reflected
in the Company’s financial statements.
Note
6 - Comprehensive Income
Comprehensive
income is summarized as follows (in millions):
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Net
earnings
|
|
$
|
58.5
|
|
$
|
59.1
|
|
$
|
174.4
|
|
$
|
177.4
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
(0.3
|
)
|
|
2.1
|
|
|
(42.1
|
)
|
|
2.7
|
|
Cash
flow derivative adjustment, net of tax
|
|
|
11.1
|
|
|
0.7
|
|
|
17.7
|
|
|
1.9
|
|
Investment
adjustment, net of tax
|
|
|
-
|
|
|
(0.3
|
)
|
|
-
|
|
|
(0.7
|
)
|
Minimum
pension liability adjustment, net of tax
|
|
|
-
|
|
|
-
|
|
|
0.6
|
|
|
-
|
|
Comprehensive
income
|
|
$
|
69.3
|
|
$
|
61.6
|
|
$
|
150.6
|
|
$
|
181.3
|
|
The
foreign currency translation adjustments are not currently adjusted for income
taxes as they relate to permanent investments in non-U.S. entities.
Note
7 - Earnings Per Share
SFAS
No.
128 “Earnings Per Share” specifies the computation, presentation and disclosure
requirements for basic and diluted earnings per share (EPS). The following
table
represents the computation of basic and diluted EPS as required by SFAS No.
128:
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
(in
millions, except per-share data):
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Basic
EPS Computation
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
58.6
|
|
$
|
59.8
|
|
$
|
181.3
|
|
$
|
178.8
|
|
Loss
from discontinued operations, net of tax
|
|
|
(0.1
|
)
|
|
(0.7
|
)
|
|
(6.9
|
)
|
|
(1.4
|
)
|
Net
earnings applicable to common shares
|
|
$
|
58.5
|
|
$
|
59.1
|
|
$
|
174.4
|
|
$
|
177.4
|
|
Average
number of shares outstanding - basic
|
|
|
119.6
|
|
|
123.0
|
|
|
120.5
|
|
|
123.6
|
|
Basic
earnings per share from continuing operations
|
|
$
|
0.49
|
|
$
|
0.49
|
|
$
|
1.50
|
|
$
|
1.45
|
|
Basic
earnings per share from discontinued operations
|
|
|
(0.00
|
)
|
|
(0.01
|
)
|
|
(0.06
|
)
|
|
(0.01
|
)
|
Basic
earnings per share
|
|
$
|
0.49
|
|
$
|
0
.48
|
|
$
|
1.45
|
|
$
|
1.44
|
|
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
(in
millions, except per-share data): |
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
EPS Computation
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
58.6
|
|
$
|
59.8
|
|
$
|
181.3
|
|
$
|
178.8
|
|
Loss
from discontinued operations, net of tax
|
|
|
(0.1
|
)
|
|
(0.7
|
)
|
|
(6.9
|
)
|
|
(1.4
|
)
|
Net
earnings applicable to common shares
|
|
$
|
58.5
|
|
$
|
59.1
|
|
$
|
174.4
|
|
$
|
177.4
|
|
Average
number of shares outstanding - basic
|
|
|
119.6
|
|
|
123.0
|
|
|
120.5
|
|
|
123.6
|
|
Effect
of dilutive stock options and other incentives
|
|
|
2.0
|
|
|
2.2
|
|
|
2.0
|
|
|
2.2
|
|
Average
number of shares outstanding - diluted
|
|
|
121.6
|
|
|
125.2
|
|
|
122.5
|
|
|
125.8
|
|
Diluted
earnings per share from continuing operations
|
|
$
|
0.48
|
|
$
|
0.48
|
|
$
|
1.48
|
|
$
|
1.42
|
|
Diluted
earnings per share from discontinued operations
|
|
|
(0.00
|
)
|
|
(0.01
|
)
|
|
(0.06
|
)
|
|
(0.01
|
)
|
Diluted
earnings per share
|
|
$
|
0.48
|
|
$
|
0.47
|
|
$
|
1.42
|
|
$
|
1.41
|
|
Note
8 - Derivatives and Hedging
The
Company reports all derivative instruments on the balance sheet at their fair
value. Foreign exchange contracts, commodity contracts and interest rate
derivatives are recorded within the “Other current assets” and “Other current
liabilities” lines on the Company’s “Condensed Consolidated Balance Sheets.”
Changes in the fair value of derivatives designated as cash flow hedges are
initially recorded in accumulated other comprehensive income and are
reclassified to earnings in the period the hedged item is reflected in earnings.
Changes in the fair value of derivatives that are not designated as cash flow
hedges are reported immediately in earnings. Cash flows resulting from
derivatives accounted for as cash flow or fair value hedges are classified
in
the same category as the cash flows from the underlying
transactions.
In
order
to manage in a manner consistent with historical processes, procedures and
systems and to achieve operating economies, certain economic hedge transactions
are not designated as hedges for accounting purposes. In those cases, which
primarily relate to precious and base metals, the Company will continue to
mark-to-market both the hedge instrument and the related position constituting
the risk hedged, recognizing the net effect in current earnings.
The
Company documents all relationships between derivative instruments designated
as
hedging instruments and the hedged items at inception of the hedges, as well
as
its risk-management strategies for the hedges. For the three- and nine-month
periods ended September 30, 2005 and 2004, there was no gain or loss recognized
in earnings resulting from hedge ineffectiveness.
Foreign
Exchange Contracts
The
Company designates as cash flow hedges certain foreign currency derivative
contracts which hedge the exposure to the foreign exchange rate variability
of
the functional-currency equivalent of foreign-currency
denominated cash flows associated with forecasted sales or forecasted purchases.
The ultimate maturities of the contracts are timed to coincide with the expected
occurrence of the underlying forecasted transactions.
As
of
September 30, 2005 and 2004, the Company reported a cumulative after-tax gain
of
$1.2 million and a cumulative after-tax loss of $0.7 million, respectively,
in
accumulated other comprehensive income relating to the change in the fair value
of derivatives designated as foreign exchange cash flow hedges. It is expected
that the cumulative gains of $1.2 million as of September 30, 2005 will be
reclassified into earnings within the next 12 months. There was no gain or
loss
reclassified from accumulated other comprehensive income into earnings as a
result of the discontinuance of cash flow hedges due to the probability of
the
original forecasted transactions not occurring or as a result of hedge
ineffectiveness. As of September 30, 2005, the maximum length of time
over
which
the
Company has hedged its exposure to movements in foreign exchange rates for
forecasted transactions is 12 months.
A
second
group of forward contracts entered into to hedge the exposure to foreign
currency fluctuations associated with certain monetary assets and liabilities
is
not designated as hedging instruments for accounting purposes. Changes in the
fair value of these items are recorded in earnings offsetting the foreign
exchange gains and losses arising from the effect of changes in exchange rates
used to measure related monetary assets and liabilities.
Commodity
Contracts
The
Company enters into contracts that are designated as cash flow hedges to protect
a portion of its exposure to movements in certain commodity prices. These
contracts primarily relate to derivatives designated as natural gas and nickel
cash flow hedges. The ultimate maturities of the contracts are timed to coincide
with the expected usage of these commodities.
For
the
nine-month periods ended September 30, 2005 and 2004, the Company reported
cumulative after-tax gains of $13.8 million and $2.4 million, respectively,
in
accumulated other comprehensive income relating to the change in the fair value
of derivatives designated as cash flow commodity hedges. It is expected that
the
cumulative gain of $13.8 million as of September 30, 2005 will be reclassified
into earnings within the next 16 months. There was no gain or loss reclassified
from accumulated other comprehensive income into earnings as a result of the
discontinuance of cash flow commodity hedges due to the probability of the
original forecasted transactions not occurring or hedge ineffectiveness. As
of
September 30, 2005, the maximum length of time over which the Company has hedged
its exposure to movements in commodity prices for forecasted transactions is
16
months.
Interest
Rate Derivatives
The
Company uses interest rate derivatives that are designated as fair value hedges
to help achieve its fixed and floating rate debt objectives. The Company
currently has three interest rate swap agreements with a total notional value
of
$150 million maturing in May 2013. These agreements effectively change fixed
rate debt obligations into floating rate debt obligations. The total notional
values and maturity dates of these agreements are equal to the face values
and
the maturity dates of the related debt instruments. For these fair value hedges,
there was no gain or loss recognized from hedged firm commitments no longer
qualifying as fair value hedges for the three- and nine-month periods ended
September 30, 2005 and 2004.
In
September 2005, the Company terminated two interest rate swap agreements, with
a
total notional value of $100 million maturing in August 2006, that were
designated as fair value hedges. The cash receipt of $0.4 million resulting
from
the termination of these two interest rate swap agreements will be amortized
to
earnings over the remaining term of the underlying debt instrument.
In
June
2005, the Company terminated two interest rate swap agreements, with a total
notional value of $120 million maturing in June 2028, that were designated
as
fair value hedges. The termination of these two interest rate swap agreements
resulted in a cash receipt of $20.1 million that will be amortized to earnings
over the remaining term of the underlying debt instrument.
In
March
2004, the Company entered into an interest rate derivative contract. This
derivative, referred to as a Forward Rate Agreement (FRA), economically hedged
the Company’s interest rate exposure for the May 15, 2004 LIBOR rate reset under
a pre-existing interest rate swap agreement. In June 2004, the Company entered
into two additional FRA contracts, which economically hedged the Company’s
interest rate exposure for the December 1, 2004 LIBOR rate reset under a
pre-existing interest rate swap agreement. These FRAs have been marked-to-market
with the gain/loss being reflected in earnings.
In
January 2005, the Company entered into two additional FRA contracts, which
economically hedged the Company’s interest rate exposure for the May 16, 2005
and the June 1, 2005 LIBOR rate reset under two pre-existing interest rate
swap
agreements. The FRA contracts were terminated in March 2005 due to favorable
market conditions, and the gain was reflected in earnings.
In
January 2005, the Company entered into a derivative agreement with a total
notional value of $74.7 million maturing in January 2012. This agreement
effectively changes a rental obligation that varies directly with short-term
commercial paper rates to a fixed payment obligation. The total notional value
and other terms of this agreement are equal to the rental payments and other
terms of an operating lease for machinery and equipment used in the Process
Technologies segment that was renewed in January 2005. This derivative is
designated as a cash flow hedge, and as such, it is marked-to-market with the
gain/loss reflected in other comprehensive income. For the nine-month period
ended September 30, 2005, the Company reported an after-tax gain of $0.8 million
in accumulated other comprehensive income. There was no gain or loss
reclassified from accumulated comprehensive income into earnings as a result
of
the discontinuance of cash flow hedges due to the probability of the original
forecasted transactions not occurring or hedge ineffectiveness.
Net
Investment Hedges
The
Company issued three tranches (the first tranche in April 2004, the second
tranche in August 2004 and the third tranche in August 2005) of 5.5 billion
Japanese yen notes (approximately $50 million for each tranche) with a blended
coupon rate of 1.0% and maturity dates of April 2009. These notes are designated
as an effective net investment hedge of a portion of the Company’s
yen-denominated investments. As such, any foreign currency gains and losses
resulting from these notes are accounted for as a component of accumulated
other
comprehensive income. For the nine-month periods ended September 30, 2005 and
2004, the Company reported a cumulative after-tax gain of $2.1 million and
$0.1
million, respectively in accumulated other comprehensive income, relating to
the
mark-to-market of these notes.
In
October 2005, the Company entered into two US dollar to euro cross-currency
interest rate derivative contracts with a total notional value of 124 million
euro (approximately $150 million). This transaction effectively swaps the
Company’s US dollar floating rate exposure for a euro floating rate exposure.
The notional euro liability of this cross-currency swap will be designated
as a
net investment hedge of a portion of the Company’s euro-denominated
investments.
Note
9 - Guarantees and Warranties
In
the
normal course of business, the Company incurs obligations with regard to
contract completion, regulatory compliance and product performance. Under
certain circumstances, these obligations are supported through the issuance
of
letters of credit. At September 30, 2005, the aggregate outstanding amount
of
letters of credit supporting such obligations amounted to $122.4 million, of
which $115.4 million will expire in less than one year, $1.1 million will expire
in two to three years, $0.2 million will expire in four to five years and $5.7
million will expire after five years. In the opinion of management, such
obligations will not significantly affect the Company’s financial position or
results of operations as the Company anticipates fulfilling its performance
obligations.
The
Company accrues for anticipated product warranty expenses on certain products.
Accruals for anticipated warranty liabilities are recorded based upon a review
of historical warranty claims experience. Adjustments are made to accruals
as
claim data and historical experience warrant. The Company’s accrual is primarily
comprised of warranty liabilities within the non-automotive business of the
Environmental Technologies segment.
The
change in the Company’s product warranty reserves is as follows (in
millions):
|
|
September
30, 2005
|
|
September
30, 2004
|
|
Balance
at beginning of year
|
|
$
|
8.7
|
|
$
|
10.0
|
|
Payments
|
|
|
(2.1
|
)
|
|
(3.6
|
)
|
Provision
|
|
|
0.3
|
|
|
3.6
|
|
Reversal
of reserve (a)
|
|
|
(1.7
|
)
|
|
(1.5
|
)
|
Balance
at end of period
|
|
$
|
5.2
|
|
$
|
8.5
|
|
|
(a)
|
In
2005, the Company reversed $1.7 million of warranty accruals ($0.8
million
due to favorable experience related to the Environmental Technologies
segment and $0.9 million due to expiration of warranties). In
|
2004,
the Company reversed a $1.5 million warranty accrual due to
favorable experience related to the Environmental Technologies
segment.
Note
10 - Goodwill and Other Intangible Assets
Identifiable
intangible assets, such as patents and trademarks, are amortized using the
straight-line method over their estimated useful lives. Goodwill and other
intangible assets that have indefinite useful lives are not amortized, but
are
tested for impairment based on the specific guidance of SFAS No. 142, “Goodwill
and Other Intangible Assets.”
The
following information relates to acquired amortizable intangible assets (in
millions):
|
|
As
of September 30, 2005
|
|
As
of December 31, 2004
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Acquired
Amortizable Intangible Assets
|
|
|
|
|
|
|
|
|
|
Usage
rights
|
|
$
|
19.8
|
|
$
|
6.6
|
|
$
|
22.2
|
|
$
|
6.3
|
|
Supply
agreements
|
|
|
18.4
|
|
|
7.0
|
|
|
19.0
|
|
|
6.3
|
|
Technology
licenses
|
|
|
11.3
|
|
|
4.5
|
|
|
9.1
|
|
|
3.5
|
|
Other
|
|
|
12.3
|
|
|
4.0
|
|
|
3.7
|
|
|
2.3
|
|
Total
|
|
$
|
61.8
|
|
$
|
22.1
|
|
$
|
54.0
|
|
$
|
18.4
|
|
Intangible
assets, other than goodwill, with indefinite useful lives, and thus not subject
to amortization, are $1.9 million as of September 30, 2005 and December 31,
2004. Total accumulated amortization for goodwill and other intangible assets
amounted to $87.3 million and $83.9 million at September 30, 2005 and December
31, 2004, respectively. As of September 30, 2005, the estimated aggregate
amortization expense for each of the five succeeding years is as follows (in
millions):
Estimated
Annual Amortization Expense:
|
|
|
|
2005
|
|
$
|
4.9
|
|
2006
|
|
|
4.7
|
|
2007
|
|
|
4.7
|
|
2008
|
|
|
4.6
|
|
2009
|
|
|
4.6
|
|
The
following table represents the changes in the carrying amount of goodwill for
the nine-month period ended September 30, 2005 (in millions):
|
|
Environmental
Technologies
|
|
Process
Technologies
|
|
Appearance
& Performance Technologies
|
|
All
Other
|
|
Total
|
|
Balance
as of January 1, 2005
|
|
$
|
20.4
|
|
$
|
108.1
|
|
$
|
201.8
|
|
$
|
0.5
|
|
$
|
330.8
|
|
Goodwill
additions (a)
|
|
|
—
|
|
|
1.5
|
|
|
63.8
|
|
|
34.4
|
|
|
99.7
|
|
Purchase
accounting adjustments (b)
|
|
|
—
|
|
|
—
|
|
|
(4.5
|
)
|
|
—
|
|
|
(4.5
|
)
|
Foreign
currency translation adjustment
|
|
|
(1.4
|
)
|
|
—
|
|
|
(4.7
|
)
|
|
—
|
|
|
(6.1
|
)
|
Goodwill
impairment (c)
|
|
|
(1.3
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1.3
|
)
|
Balance
as of September 30, 2005
|
|
$
|
17.7
|
|
$
|
109.6
|
|
$
|
256.4
|
|
$
|
34.9
|
|
$
|
418.6
|
|
|
(a)
|
Goodwill
additions amount includes $63.8 million related to the Company’s
acquisition of Coletica, S.A. during the first quarter of 2005, $34.4
million related to the acquisition of Almatis AC, Inc. during the
third
quarter and $1.5 million related to the acquisition of the catalyst
business of Nanjing Chemical Industry
|
|
Corporation during the second quarter of 2005.
These
amounts represent the excess of the purchase price paid over the
fair
market value of the net assets acquired. The Company is completing
its
review and determination of these fair values, and thus the allocation
of
the purchase price is subject to
revision.
|
|
(b)
|
Purchase
accounting adjustment of $4.5 million relates to a revision of the
allocation of the purchase price of The Collaborative Group, Ltd.,
including its wholly owned subsidiary Collaborative Laboratories,
Inc.,
acquired by the Company in the third quarter of 2004, in accordance
with
SFAS No. 141, “Business
Combinations.”
|
|
(c)
|
Goodwill
impairment charge of $1.3 million was recorded by the Company in
the
second quarter of 2005, in accordance with SFAS No. 142, “Goodwill and
Other Intangible Assets,” related to the Company’s discontinuance of
manufacturing operations at its Carteret, New Jersey
facility.
|
Note
11 - Committed Metal Positions and Hedged Metal
Obligations
|
|
September
30, 2005
|
|
December
31, 2004
|
|
Committed
Metal Positions were comprised of the following (in
millions):
|
|
|
|
|
|
Metals
in a net spot long position economically hedged with derivatives
(primarily forward sales)
|
|
$
|
633.8
|
|
$
|
324.1
|
|
Fair
value of hedging derivatives in a “gain” position
|
|
|
7.1
|
|
|
14.2
|
|
Unhedged
metal positions, net (see analysis below)
|
|
|
46.1
|
|
|
19.3
|
|
Fair
value of metals received with prices to be determined, net of hedged
spot
sales
|
|
|
—
|
|
|
99.9
|
|
Total
committed metal positions
|
|
$
|
687.0
|
|
$
|
457.5
|
|
Both
spot
metal positions and derivative instruments are stated at fair value. Fair value
is based on relevant published market prices. The following table sets forth
the
Company’s unhedged metal positions included in the committed metal positions
line on the Company’s “Condensed Consolidated Balance Sheets.”
Metal
Positions Information (in millions):
|
|
September
30, 2005
|
|
December
31, 2004
|
|
|
|
Net
Position
|
|
Value
|
|
Net
Position
|
|
Value
|
|
Platinum
group metals
|
|
|
Long
|
|
$
|
43.8
|
|
|
Long
|
|
$
|
19.4
|
|
Gold
|
|
|
Long
|
|
|
1.6
|
|
|
Flat
|
|
|
—
|
|
Silver
|
|
|
Long
|
|
|
0.4
|
|
|
Short
|
|
|
(0.9
|
)
|
Base
metals
|
|
|
Long
|
|
|
0.3
|
|
|
Long
|
|
|
0.8
|
|
Total
unhedged metal positions
|
|
|
|
|
$
|
46.1
|
|
|
|
|
$
|
19.3
|
|
Committed
metal positions may include significant advances made for the purchase of
precious metals that have been delivered to the Company but for which the final
purchase price has not yet been determined. As of December 31, 2004, the
aggregate market value of the metals purchased under a contract for which a
provisional price has been paid was in excess of the amounts advanced by a
total
of $49.9 million which is recorded as a current liability.
|
|
September
30, 2005
|
|
December
31, 2004
|
|
Hedged
Metal Obligations were comprised of the following (in
millions):
|
|
|
|
|
|
Metals
in a net spot short position economically hedged with derivatives
(primarily forward purchases) - represents a payable for the return
of
spot metal to counterparties
|
|
$
|
511.1
|
|
$
|
265.1
|
|
Fair
value of hedging derivatives in a “loss” position
|
|
|
32.0
|
|
|
27.8
|
|
Total
hedged metal obligations
|
|
$
|
543.1
|
|
$
|
292.9
|
|
At
September 30, 2005 and December 31, 2004, hedged metal obligations relating
to
1,132,605 and 603,330 troy ounces of gold, respectively, were outstanding.
These
quantities were sold short on a spot basis generating cash approximating $518
million and $266 million, respectively. These spot sales were hedged with
forward purchases for the same number of ounces at an average price of $457.81
at September 30, 2005 and $441.23 at December 31, 2004. Unless a forward
counterparty failed to perform, there was no risk of loss in the event prices
rose. All counterparties for such transactions are investment
grade.
Derivative
metal and foreign currency instruments are used to hedge metal positions and
obligations. As of September 30, 2005, 98% of these instruments have settlement
terms of less than one year, with the remaining instruments expected to settle
within 42 months. These derivative metal and foreign currency instruments
consist of the following:
Metal
Hedging Instruments (in millions):
|
|
September
30, 2005
|
|
December
31, 2004
|
|
|
|
Buy
|
|
Sell
|
|
Buy
|
|
Sell
|
|
Metal
forwards/futures
|
|
$
|
781.6
|
|
$
|
746.9
|
|
$
|
625.2
|
|
$
|
662.6
|
|
Eurodollar
futures
|
|
|
124.0
|
|
|
62.3
|
|
|
11.2
|
|
|
136.6
|
|
Swaps
|
|
|
26.6
|
|
|
9.2
|
|
|
31.2
|
|
|
9.8
|
|
Options
|
|
|
19.5
|
|
|
9.1
|
|
|
3.9
|
|
|
—
|
|
Foreign
exchange forwards/futures - Japanese yen
|
|
|
—
|
|
|
83.8
|
|
|
—
|
|
|
130.8
|
|
Foreign
exchange forwards/futures - Euro
|
|
|
—
|
|
|
37.8
|
|
|
—
|
|
|
23.4
|
|
Foreign
exchange forwards/futures - Other
|
|
|
3.1
|
|
|
—
|
|
|
5.5
|
|
|
—
|
|
Note
12 - New Accounting Pronouncements
In
May
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,”
which replaces APB Opinion No. 20, “Accounting Changes” and FASB Statement No.
3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS No. 154
requires retrospective application to prior periods’ financial statements for
voluntary changes in accounting principle unless it is impracticable. SFAS
No.
154 is effective for accounting changes and corrections of errors made in fiscal
years beginning after June 1, 2005.
At
the
March 17, 2005 EITF (Emerging Issues Task Force) meeting, the Task Force reached
a consensus on Issue No. 04-06, “Accounting for Stripping Costs Incurred during
Production in the Mining Industry.” In the mining industry, companies may be
required to remove overburden and other mine waste materials to access mineral
deposits. The costs of removing overburden and waste materials are referred
to
as stripping costs. During the development of a mine (before production begins),
it is generally accepted in practice that stripping costs are capitalized as
part of the depreciable cost of building, developing, and constructing the
mine.
Those capitalized costs are typically
amortized over the productive life of the mine using the units of production
method. A mining company may continue to remove overburden and waste materials,
and therefore incur stripping costs, during the production phase of the mine.
The EITF has reached a consensus that stripping costs incurred during the
production
phase of a mine are variable production costs that should
be
included in the costs of the inventory produced during the period that the
stripping costs are incurred. The Board ratified this consensus at its March
30,
2005 meeting. The guidance in this consensus will be effective for financial
statements issued for fiscal years beginning after December 15, 2005. The
Company is in the process of assessing the impact of this consensus on its
financial statements, but expects to record a charge to equity as a result
of
the adoption of EITF No. 04-06.
In
December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment,” which
replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes
APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123(R)
requires compensation costs relating to share-based payment transactions,
including grants of employee stock options, be recognized in the financial
statements based on their fair values. The pro forma disclosure previously
permitted under SFAS No. 123 will no longer be an acceptable alternative to
recognition of expenses in the financial statements. In April 2005, the
Securities and Exchange Commission issued a new rule that amends the effective
date of SFAS No. 123(R) to the beginning of the next fiscal year. As a result,
the Company will adopt this statement on January 1, 2006. The Company currently
measures compensation costs related to share-based payments under APB No. 25,
as
allowed by SFAS No. 123, and provides disclosure in the notes to financial
statements as required by SFAS No. 123. SFAS No. 123(R) provides for two
transition alternatives: Modified-Prospective transition and
Modified-Retrospective transition. The Company is currently evaluating the
transition alternatives and the impact on the Company’s financial
statements.
In
December 2004, the FASB issued FASB Staff Position (FSP) No. 109-1 to provide
guidance on the application of SFAS No. 109, “Accounting for Income Taxes” to
the provision within the American Jobs Creation Act of 2004, enacted on October
22, 2004, that provides tax relief to U.S. domestic manufacturers. The FSP
states that the manufacturers’ deduction provided for under the Act should be
accounted for as a special deduction in accordance with SFAS No. 109 and not
as
a tax rate reduction.
In
December 2004, FASB Staff Position (FSP) No. 109-2, “Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004” was issued, providing guidance under SFAS No. 109,
“Accounting for Income Taxes” for recording the potential impact of the
repatriation provisions of the American Jobs Creation Act of 2004, enacted
on
October 22, 2004. FSP No. 109-2 allows time beyond the financial reporting
period of enactment to evaluate the effects of the Act before applying the
requirements of FSP No. 109-2. The Company has assessed the new tax rules
relating to the repatriation of offshore earnings and has decided not to
repatriate any amounts from its foreign subsidiaries at a reduced tax rate
under
the Act due to its intention to increase its investments outside of the United
States.
Note
13 - Stock Option and Bonus Plans
The
Company has several long-term incentive compensation plans that allow for the
granting of stock options to employees. Had compensation cost for the Company’s
stock option plans been determined based on the fair value at grant date
consistent with the provisions of SFAS No. 123, “Accounting for Stock-Based
Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based
Compensation — Transition and Disclosure,” the Company’s net earnings and
earnings per share would have been as follows:
Pro
Forma Information
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
(in
millions, except per share-data):
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Net
earnings - as reported
|
|
$
|
58.5
|
|
$
|
59.1
|
|
$
|
174.4
|
|
$
|
177.4
|
|
Deduct:
Total stock-based employee compensation expense determined under
fair
value based method for all awards, net of tax
|
|
|
0.8
|
|
|
0.9
|
|
|
3.9
|
|
|
4.4
|
|
Net
earnings - pro forma
|
|
$
|
57.7
|
|
$
|
58.2
|
|
$
|
170.5
|
|
$
|
173.0
|
|
Pro
Forma Information |
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
(in
millions, except per share-data): |
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
Earnings
Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share - as reported
|
|
$
|
0.49
|
|
$
|
0.48
|
|
$
|
1.45
|
|
$
|
1.44
|
|
Basic
earnings per share - pro forma
|
|
|
0.48
|
|
|
0.47
|
|
|
1.41
|
|
|
1.40
|
|
Diluted
earnings per share - as reported
|
|
|
0.48
|
|
|
0.47
|
|
|
1.42
|
|
|
1.41
|
|
Diluted
earnings per share - pro forma
|
|
|
0.47
|
|
|
0.47
|
|
|
1.39
|
|
|
1.37
|
|
In
December 2004, the FASB issued SFAS No. 123(R), “Share Based Payment.” This
standard, although not yet effective, clarifies guidance relating to stock
options granted to employees that are eligible to retire. This guidance states
that options granted to employees eligible to retire should be expensed on
the
date of grant versus over the vesting period. As a result, the Company has
revised its pro forma stock option disclosures to reflect the change. Full
year
pro forma diluted EPS for 2003 and 2004 will remain unchanged at $1.79 and
$1.82, respectively. Revised quarterly pro forma diluted EPS will be $0.38,
$0.53, $0.47, and $0.44 for the quarters ended March 31, 2004, June 30, 2004,
September 30, 2004, and December 31, 2004, respectively. Reported amounts for
those same periods were $0.38, $0.53, $0.46, and $0.46.
Note
14 - Benefits
The
Company has domestic and foreign pension plans covering substantially all
employees. The Company also provides post-employment and postretirement benefits
to certain eligible employees. The components of net periodic benefit cost
for
the nine-month periods ended September 30, 2005 and 2004 are shown in the
following table:
Net
Periodic Benefit Cost (in millions):
|
|
Pension
Benefits
|
|
Other
Benefits
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Service
cost
|
|
$
|
17.9
|
|
$
|
16.5
|
|
$
|
3.1
|
|
$
|
3.0
|
|
Interest
cost
|
|
|
30.3
|
|
|
28.4
|
|
|
5.9
|
|
|
6.3
|
|
Expected
return on plan assets
|
|
|
(36.7
|
)
|
|
(36.1
|
)
|
|
—
|
|
|
—
|
|
Amortization
of prior service cost
|
|
|
1.9
|
|
|
2.4
|
|
|
(1.6
|
)
|
|
(1.6
|
)
|
Recognized
actuarial loss
|
|
|
10.7
|
|
|
8.0
|
|
|
0.7
|
|
|
1.0
|
|
Net
periodic benefit cost
|
|
$
|
24.1
|
|
$
|
19.2
|
|
$
|
8.1
|
|
$
|
8.7
|
|
The
Company made a voluntary $50.0 million contribution to its domestic defined
benefit pension plans during the third quarter of 2005. In addition to the
voluntary contribution, the Company made required additional contributions
of
approximately $7 million to its domestic and foreign defined benefit
pension plans during the nine months ended September 30, 2005. Contributions
during the fourth quarter are expected to be approximately $0.5 million. The
Company uses September 30th as its measurement date to value pension
assets and set the applicable discount rate used in determining the projected
benefit obligation and 2006 pension expense. Based on current economic
conditions, it is anticipated that the Company will lower the domestic discount
rate by 50 basis points and the foreign discount rates by 50 to 150 basis
points. This would increase 2006 pension expense by approximately $7 million.
Other factors including asset returns and plan experience will additionally
increase pension expense by approximately $3 million in 2006. The Company
expects full year 2006 pension expense to be approximately $42
million.
On
December 8, 2003, the President of the United States signed into law the
Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the
Act).
This Act introduces a prescription drug benefit under Medicare (Medicare Part
D), as well as a federal subsidy to sponsors of retiree health care benefit
plans that provide a benefit that is at least actuarially equivalent to Medicare
Part D. After a review of the Company’s plan design, the Company and its
consulting actuaries believe the Company’s plan is actuarially equivalent to
Medicare Part D. In
accordance
with FASB Staff Position (FSP) No. 106-2, “Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003,” the Company revalued the benefit obligation and
determined that the reduction in the accumulated postretirement benefit
obligation for the subsidy related to the benefits attributed to past service
is
$15 million. The effects of this act will reduce the net periodic benefit
cost
by $2.0 million for the year ended December 31, 2005.
The
Company incurred benefit payments of $9.2 million for the nine-month period
ended September 30, 2005. Expected future benefit payments, including
prescription drug benefits, are as follows (in millions):
Year
|
|
|
|
2005
(October 1 through December 31)
|
|
$
|
3.1
|
|
2006
|
|
|
11.2
|
|
2007
|
|
|
10.6
|
|
2008
|
|
|
10.0
|
|
2009
|
|
|
9.4
|
|
2010
through 2014
|
|
|
44.0
|
|
The
Company expects the following reimbursements under the subsidy portion of the
Medicare Prescription Drug, Improvement and Modernization Act of 2003 (in
millions):
Year
|
|
|
|
2005
(October 1 through December 31)
|
|
$
|
—
|
|
2006
|
|
|
1.7
|
|
2007
|
|
|
1.9
|
|
2008
|
|
|
1.9
|
|
2009
|
|
|
2.0
|
|
2010
through 2014
|
|
|
8.3
|
|
Note
15 - Supplemental Information
The
following table presents certain supplementary information to the Company’s
“Condensed Consolidated Statements of Cash Flows”:
Supplementary
Cash Flow Information (in millions):
|
|
Nine
Months Ended September 30,
|
|
|
|
2005
|
|
2004
|
|
Materials
Services related:
|
|
|
|
|
|
Change
in assets and liabilities - source (use):
|
|
|
|
|
|
Receivables
|
|
$
|
(2.1
|
)
|
$
|
(1.8
|
)
|
Committed
metal positions
|
|
|
(275.2
|
)
|
|
(83.2
|
)
|
Inventories
|
|
|
0.2
|
|
|
0.2
|
|
Other
current assets
|
|
|
(0.4
|
)
|
|
0.5
|
|
Accounts
payable
|
|
|
3.6
|
|
|
39.1
|
|
Hedged
metal obligations
|
|
|
246.0
|
|
|
(0.7
|
)
|
Other
current liabilities
|
|
|
(2.0
|
)
|
|
(2.1
|
)
|
Net
cash flows from changes in assets and liabilities
|
|
$
|
(29.9
|
)
|
$
|
(48.0
|
)
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
2005
|
|
|
2004
|
|
All
Other:
|
|
|
|
|
|
|
|
Change
in assets and liabilities - source (use):
|
|
|
|
|
|
|
|
Receivables
|
|
$
|
(91.7
|
)
|
$
|
(39.5
|
)
|
Inventories
|
|
|
(67.9
|
)
|
|
(1.4
|
)
|
Other
current assets
|
|
|
1.5
|
|
|
(5.3
|
)
|
Other
noncurrent assets
|
|
|
(35.9
|
)
|
|
6.4
|
|
Accounts
payable
|
|
|
63.2
|
|
|
(2.8
|
)
|
Other
current liabilities
|
|
|
45.4
|
|
|
(6.8
|
)
|
Noncurrent
liabilities
|
|
|
(12.7
|
)
|
|
(2.5
|
)
|
Net
cash flows from changes in assets and liabilities
|
|
$
|
(98.1
|
)
|
$
|
(51.9
|
)
|
Note
16 - Other Matters
The
Company is involved in a value-added tax dispute in Peru. Management believes
the Company was targeted by corrupt officials within a former Peruvian
government. On December 2, 1999, Engelhard Peru, S.A., a wholly owned
subsidiary, was denied refund claims of approximately $28 million. The Peruvian
tax authority also determined that Engelhard Peru, S.A. is liable for
approximately $63 million in refunds previously paid, fines and interest as
of
December 31, 1999. Interest and fines continue to accrue at rates established
by
Peruvian law. The Peruvian Tax Court ruled on February 11, 2003 that Engelhard
Peru, S.A. was liable for these amounts, overruling precedent to apply a “form
over substance” theory without any determination of fraudulent participation by
Engelhard Peru, S.A. As part of its efforts to vigorously contest this
determination, Engelhard Peru, S.A. filed a constitutional action against the
Peruvian Tax agency and Tax Court. On May 3, 2004, the judge in this action
ruled that none of the findings of the Peruvian tax authorities were properly
applicable to Engelhard Peru, S.A. based on several grounds, including improper
use of a presumption of guilt with no actual proof of irregularity in the
transactions of Engelhard Peru, S.A. The government of Peru prevailed on appeal
to the Superior Court and the matter is now on appeal to Peru's
Constitutional Court. Management believes, based on consultation with counsel,
that Engelhard Peru, S.A. is entitled to all refunds claimed and is not liable
for any additional taxes, fines or interest. In late October 2000, a criminal
proceeding alleging tax fraud and forgery related to this value-added tax
dispute was initiated against two Lima-based officials of Engelhard Peru, S.A.
In September 2005, a Superior prosecutor concluded that there was no basis
for
the criminal proceedings against several defendants, including both officials
of
Engelhard Peru S.A. Final dismissal of those criminal charges remains subject
to
judicial review and determination of the Supreme Prosecutor. Although Engelhard
Peru, S.A. is not a defendant, it may be civilly liable in Peru if its
representatives are found responsible for criminal conduct. In its own
investigation, and in detailed review of the materials presented in Peru,
management has not seen any evidence of tax fraud by these officials.
Accordingly, Engelhard Peru, S.A. is assisting in the vigorous defense of this
proceeding. Management believes the maximum economic exposure is limited to
the
aggregate value of all assets of Engelhard Peru, S.A. That amount, which is
approximately $30 million, including unpaid refunds, has been fully provided
for
in the accounts of the Company.
Note
17 - Income Taxes
The
Company’s effective tax rate (“ETR”) is dependent upon many factors including
(1) the impact of enacted tax laws in jurisdictions in which the Company
operates, (2) the amount of earnings by jurisdiction due to varying tax rates
by
country, (3) the amount of depletion deductions related to the Company's mining
activities, (4) the ability to utilize minimum tax credits, foreign tax credits
and research and development tax credits and (5) the amount of extraterritorial
income and domestic production related benefits.
The
ETR
on continuing operations for the nine months ended September 30, 2005 was 20%.
Based upon the Company’s assessment of the above factors and considering tax
settlements and changes in estimate to date, the tax rate for the full year
2005
is expected to approximate this rate.
In
the
first quarter of 2005, the Company recorded a $2.7 million reduction of tax
expense resulting from an agreement with the IRS relating to the audit of the
Company’s tax return for 2001. The Company is currently under examination for
the 2002 and 2003 tax periods with the IRS, and the Company also seeks
resolution with tax authorities in foreign jurisdictions in which the Company
operates.
In
the
second quarter, the Company recorded a benefit of $5.7 million related to prior
tax periods in the Netherlands and a tax expense of $3.3 million related to
prior tax periods in Germany, due to changes in estimates based upon information
obtained during the audit process.
In
the
current quarter, as a result of the Company filing its 2004 federal income
tax
return, the Company recorded a tax benefit of approximately $6 million due
to a
change in estimate in the current period associated with the American Jobs
Creation Act (the "Act") in respect of foreign tax credits relating to its
minority investments in certain foreign corporations which had previously been
subject to a valuation allowance. In addition, due to the expiration of a tax
closing agreement covering the tax years 1998-2004 with the state of New Jersey
which the state has not agreed to extend to 2005 and beyond, the Company
recorded an additional state income tax expense of approximately $2 million
(after federal income tax effect). Finally, the Company has decided not to
repatriate any amounts from its foreign subsidiaries at a reduced tax rate
under
the Act due to its intention to increase its investments outside of the United
States.
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Unless
otherwise indicated, all per-share amounts are presented as diluted earnings
per
share, as calculated under SFAS No. 128, “Earnings per Share.”
Overview
The
Company develops, manufactures and markets value-adding technologies based
on
surface and materials science for a wide spectrum of served markets. The Company
also provides its technology segments, their customers and others with precious
and base metals and related services. The Company’s businesses are organized
into four reportable segments that are discussed individually below. Additional
detailed descriptive material is included in “ITEM 1. BUSINESS” and NOTE 19,
“BUSINESS SEGMENT AND GEOGRAPHIC AREA DATA” in the Company’s 2004 Form 10-K.
Comparative financial data is also given in Note 19 of the Company’s 2004 Form
10-K and on page 5 of this Form 10-Q.
One
of
the strengths of the Company is that its segments serve diverse markets, which
is important for assessing the variability of future cash flows. The following
economic comments also provide a useful context for evaluating the Company’s
performance: (1) worldwide auto builds continue to be relatively flat, albeit
at
fairly high levels - industry growth for auto-emission catalysts will benefit
from tougher environmental regulation throughout the world over the next 5-10
years as well as developing economies, especially new Asian production; (2)
more
stringent diesel-emission regulations are being phased in, affording the Company
additional opportunities for catalyst solutions; (3) worldwide petroleum
refineries are generally operating close to capacity (recently they are
operating at capacity due to Gulf Coast hurricanes) generating demand for the
extra yields provided by the Company’s advanced fluid cracking catalysts and
performance additives; (4) markets for effect pigments, colors and active
ingredients in cosmetics, auto finishes and coatings have remained positive
during the recent economic downturns and tend to be less cyclical; however,
the
Company is currently experiencing growing competition from Asian producers;
(5)
the coated, free-sheet paper market has strengthened, but pricing and related
market share loss continue to negatively impact the Company; (6) inflationary
pressures for raw materials and energy, particularly natural gas, are expected
to have a negative impact across the Company’s technology segments compared to
the recent low inflationary period, which the Company will attempt to mitigate
via price increases and (7) margins related to the supply of metal to industrial
customers have been lower in recent years because of changes in pricing and
supply arrangements.
Results
of Operations
The
information in the discussion of each segment’s results discussed below is
derived directly from the internal financial reporting system used for
management purposes. Items allocated to each segment’s results include the
majority of corporate operating expenses. Unallocated items include interest
expense, interest income, certain royalty income, sale of precious metals
accounted for under the last-in, first-out (LIFO) method, certain special
charges and credits, income taxes, certain information technology development
costs and other miscellaneous corporate items.
Comparison
of the Third Quarter of 2005 with the Third Quarter of
2004
Net
earnings from continuing operations decreased to $58.6 million in the third
quarter of 2005 compared with $59.8 million in the third quarter of 2004.
Operating earnings decreased to $70.7 million in the third quarter of 2005
compared with $74.8 million in the same period last year, due to decreased
earnings in the Appearance and Performance Technologies segment, decreased
earnings in the Materials Services segment and higher unallocated corporate
and
other expenses, partially offset by higher earnings from the Process
Technologies segment. Earnings from equity method joint ventures increased
in
the quarter, reflecting strength from the Company’s Asian equity method joint
ventures. These Asian joint ventures are an integral component of the Company’s
growth strategy, and serve as the Company’s presence in the Japanese and Korean
automotive markets. Loss from discontinued operations decreased in the quarter
due to gains realized on the sale of equipment.
Hurricane
and Natural Gas Impacts
In
the
current quarter, the Company experienced a negative economic impact from
hurricanes Katrina and Rita. The Company operates a number of facilities in
Georgia, and some facilities in Louisiana, Mississippi and Texas that were
affected by these hurricanes. Additionally, many of the Company’s suppliers,
customers and logistics network providers were directly impacted by these
hurricanes. Direct impacts from these hurricanes such as customer and supplier
force majeure declarations, lost production time, and facility damage are
readily quantifiable and were approximately $1 million in the current quarter.
In the third quarter of 2004, the Company experienced similar negative impacts
from hurricanes. Indirect impacts, such as higher natural gas and other energy
costs, higher raw material costs as a result of supplier difficulties, higher
logistics costs due to fuel and disrupted distribution networks and short-term
productivity costs exist but are not readily quantifiable. Already high natural
gas prices have further increased because of Gulf Coast hurricanes. Natural
gas
prices have negatively impacted the Company by approximately $4 million in
the
current quarter compared to the same quarter last year. Natural gas prices
are
expected to negatively impact the Company by approximately $25 million for
the
full year ending December 31, 2005 compared to the prior full year.
Equity
Earnings
The
Company’s share of equity earnings from affiliates was $8.7 million in the third
quarter of 2005 compared with $6.1 million in the same period last year,
reflecting strength in the Asian automotive markets, and an increased ownership
percentage in NECC. European and North American automobile builds were down
in
the third quarter, but automobile builds in Asia were higher compared with
the
same period last year. The Company serves the Japanese and Korean mobile-source
emissions control markets through its Asian joint ventures NECC and Heesung,
respectively. The Company expects these operations to produce earnings near
current levels for the remainder of 2005 and the first half of 2006. It should
be noted that growth in Asia is primarily driven by the expanding China economy,
which the Company serves through consolidated subsidiaries included in the
Environmental Technologies segment.
Interest
Income and Expense
Interest
expense increased to $11.1 million in the third quarter of 2005 compared with
$5.1 million in the third quarter of 2004 due to both higher short-term
borrowing rates and higher average debt levels. Interest income increased to
$3.7 million in the third quarter of 2005 compared with $1.2 million in the
third quarter of 2004. In 2002, the Company established a cash-pooling program,
which has been expanded significantly over the past year. While this program
allows for the efficient and cost effective funding of the Company’s foreign
subsidiaries, primarily in Europe, it has the effect of increasing both interest
income and interest expense in proportion to the changes in the underlying
cash
and short-term debt balances. In the current quarter, approximately $2.5 million
of the increase in interest expense and interest income is due to the use of
the
cash pooling system. Higher debt levels were also driven by acquisitions and
working capital requirements (please see the section on Liquidity and Capital
Resources).
Income
Taxes
The
Company’s effective tax rate (“ETR”) is dependent upon many factors including
(1) the impact of enacted tax laws in jurisdictions in which the Company
operates, (2) the amount of earnings by jurisdiction due to varying tax rates
by
country, (3) the amount of depletion deductions related to the Company's mining
activities, (4) the ability to utilize minimum tax credits, foreign tax credits
and research and development tax credits and (5) the amount of extraterritorial
income and domestic production related benefits.
The
ETR
on continuing operations for the nine months ended September 30, 2005 was 20%.
Based upon the Company’s assessment of the above factors and considering tax
settlements and changes in estimate to date, the tax rate for the full year
2005
is expected to approximate this rate.
In
the
first quarter of 2005, the Company recorded a $2.7 million reduction of tax
expense resulting from an agreement with the IRS relating to the audit of the
Company’s tax return for 2001. The Company is currently under examination for
the 2002 and 2003 tax periods with the IRS, and the Company also seeks
resolution with tax authorities in foreign jurisdictions in which the Company
operates.
In
the
second quarter, the Company recorded a benefit of $5.7 million related to prior
tax periods in the Netherlands and a tax expense of $3.3 million related to
prior tax periods in Germany, due to changes in estimates based upon information
obtained during the audit process.
In
the
current quarter, as a result of the Company filing its 2004 federal income
tax
return , the Company recorded a tax benefit of approximately $6 million due
to a
change in estimate in the current period associated with the American Jobs
Creation Act (the "Act") in respect of foreign tax credits relating to its
minority investments in certain foreign corporations which had previously been
subject to a valuation allowance. In addition, due to the expiration of a tax
closing agreement covering the tax years 1998-2004 with the state of New Jersey,
which the state has not agreed to extend to 2005 and beyond, the Company
recorded an additional state income tax expense of approximately $2 million
(after federal income tax effect). Finally, the Company has decided not to
repatriate any amounts from its foreign subsidiaries at a reduced tax rate
under
the Act due to its intention to increase its investments outside of the United
States.
Environmental
Technologies
The
majority of this segment’s sales is derived from technologies to control harmful
emissions from mobile sources, including gasoline- and diesel-powered passenger
cars, sport-utility vehicles, trucks, buses and motorcycles. This segment’s
customers are driven by increasingly stringent environmental regulations, for
which the Company provides sophisticated emission-control technologies. The
remainder of this segment’s sales is derived from products sold into a variety
of industrial markets, including aerospace, power generation, process industries
and utility engines. The Company supplies these industrial markets with
sophisticated emission-control technologies, high-value material products made
primarily from platinum group metals and thermal spray and coating
technologies.
Results
of Operations (in
millions)
|
|
Q3
2005
|
|
Q3
2004
|
|
%
change
|
|
Sales
|
|
$
|
254.7
|
|
$
|
213.4
|
|
|
19.4
|
%
|
Operating
earnings
|
|
|
33.3
|
|
|
34.0
|
|
|
-2.1
|
%
|
Discussion
Results
from this segment were as expected, driven primarily by operations serving
the
overseas mobile-source environmental markets.
Revenues
from mobile-source markets increased 19% in the third quarter of 2005 compared
with the same period in 2004. Approximately 90% of this increase was due to
increased pass-through substrate costs. Substrate costs were higher primarily
due to increased demand for catalyzed soot filters (CSF) to the European light
duty diesel market. This significantly increased the segment’s working capital
requirements for the second consecutive quarter. This trend of increasing
substrate costs, revenues and associated working capital requirements is
expected to continue in the near term, as the Company continues to grow its
CSF
business. The Company serves a wide customer base, and changes in the mix of
sales to these markets are common. In the third quarter of 2005 compared with
the third quarter of 2004, sales to North American automotive customers
decreased, while sales to European, Asian and emerging market automotive
customers increased. Sales to the motorcycle, diesel retrofit and other niche
mobile-source environmental markets increased compared with the year ago
quarter.
Operating
earnings from mobile-source markets decreased in the third quarter of 2005
compared with the third quarter of 2004. Items negatively impacting earnings
comparisons include: absence of warranty accrual reversals of $1.5 million
in
2004, higher operating costs of approximately $1 million and an increase in
the
allowance for doubtful accounts of $0.7 million due to the bankruptcy of Delphi.
The Company will continue to assess counterparty risk on sales to the North
American automotive market and establish credit limits and assess collectibility
accordingly. Currency impacts totaling approximately $2 million positively
impacted earnings compared to the year ago quarter. Profits from automotive
markets were flat compared to the third quarter last year, as the
above-mentioned increased demand for light duty diesel applications (primarily
in Europe) was offset by decreased demand for gasoline applications (primarily
in North America). The Company expects this trend to
continue near-term, as previously disclosed. The Company
serves the large Asian markets of Japan and Korea through joint ventures
accounted for under the equity method. Accordingly, the results of those
operations, reflecting continued strength in the Asian markets, are included
on
the equity earnings line. Operating earnings from heavy-duty diesel OEM markets
decreased against the year ago quarter, which also included a warranty accrual
reversal of $1.5 million, as mentioned above. These diesel OEM volumes are
expected to remain at or below current levels until the latter half of 2006,
when regulations taking effect in 2007 begin to impact the market. Profits
from
motorcycle, diesel retrofit and other niche markets improved, as the Company
continues to diversify its served market base. Diesel retrofit markets are
largely dependent on state legislative actions, and the associated funding
for
these projects.
Sales
to
industrial product markets increased in the third quarter of 2005 compared
with
the third quarter of 2004. Sales to power-generation customers increased in
the
period, but are not indicative of a rebound in the power-generation market.
Sales to other industrial markets were relatively flat compared with the same
quarter last year. Results from the Company’s Carteret, NJ manufacturing
facility are no longer included in this discussion, as these results are now
included in discontinued operations.
Operating
earnings from industrial product markets increased in the third quarter of
2005
compared with the third quarter of 2004, and have resulted in positive earnings
in the current period. Earnings from sales to most served markets were modestly
higher, with the exception of temperature sensing operations, which incurred
higher costs compared to flat revenues due to the mix of products sold. The
temperature-sensing market, while relatively small, represents a niche growth
area for the Company. While sales and earnings from the Company’s thermal spray
and coating operations serving the aerospace and power generation markets
improved, more work needs to be done, and the Company has recently augmented
operational management. The Company expects continued near-term improvement
in
overall earnings from industrial product markets, but continues to evaluate
the
long-term viability of these operations.
Process
Technologies
The
Process Technologies segment enables customers to make their processes more
productive, efficient, environmentally sound and safer through the supply of
advanced chemical-process catalysts, additives and sorbents.
Results
of Operations (in
millions)
|
|
Q3
2005
|
|
Q3
2004
|
|
%
change
|
|
Sales
|
|
$
|
167.0
|
|
$
|
147.8
|
|
|
13.0
|
%
|
Operating
earnings
|
|
|
23.3
|
|
|
20.7
|
|
|
12.6
|
%
|
Discussion
This
segment experienced strong results in the third quarter of 2005 as productivity
improvements in operations serving the petroleum refining business yielded
strong results, and catalyst sales to the major chemical markets
increased.
Sales
to
the petroleum-refining market increased 14% in the third quarter of 2005
compared with the third quarter of 2004. Higher volumes and prices of
petroleum-refining catalyst drove the improvement, as demand remained strong
for
catalyst based on the Company’s Distributed Matrix Structure (DMS) technology
platform. DMS technology allows refiners to increase yields, and accordingly,
these products sell at premium prices. In the second quarter of 2005, the
Company announced price increases to this market, which have been successful.
The Company experienced decreased demand in the quarter for certain older
product offerings. Demand for these older product offerings is expected to
remain near current levels for the near-term. Sales of additives, which have
been a source of growth over the past two years, increased modestly, as these
markets have been substantially penetrated at this point in time.
Operating
earnings from products sold to petroleum-refining markets increased in the
third
quarter of 2005 compared with the third quarter of 2004 due primarily to the
aforementioned increase in prices and volumes. These improvements were partially
offset by higher natural gas costs of approximately $1 million, other hurricane
Katrina
impacts (please see the section on Hurricane and Natural
Gas
Impacts), higher raw material costs and higher selling costs. During 2004,
strong demand for DMS technology began to exceed existing capacity at the
operating facilities that produce these products. In the second quarter of
2005,
the Company completed and implemented a project to reduce costs and increase
capacity at these facilities, resulting in lower per unit manufacturing costs
compared to the third quarter of last year. The Company plans to maintain an
asset utilization rate of approximately 90% for DMS offerings for the
foreseeable future. Higher natural gas expense is expected to negatively impact
this business by approximately $3 million in the fourth quarter of 2005 compared
with the fourth quarter of 2004.
Sales
of
catalysts to the chemical-process markets increased in the third quarter of
2005
compared with the third quarter of 2004. The increase in revenues came from
the
oleochemical, petrochemical and fine chemical markets, and was partially offset
by decreased sales to the polyolefin markets. The second quarter acquisition
of
the catalyst business of Nanjing Chemical Industry Corporation accounted for
$4.0 million of sales increases in the third quarter. The increased demand
experienced in the quarter is expected to continue into the near future,
although not at the levels of increase experienced this quarter. Volumes of
polypropylene catalysts decreased in the third quarter of 2005 compared with
the
same period in 2004. Tightness in the Asian supply of monomer, and some
decreased domestic demand negatively impacted the Company’s revenues from
products sold to the polyolefin market in the current quarter. Price increases
initiated in 2004 and 2005 accounted for $1.3 million of higher revenues from
the chemical-process markets.
Operating
earnings from products sold to chemical-process markets were flat in the third
quarter of 2005 compared with the third quarter of 2004. Increased earnings
from
higher volumes and prices of products sold to the fine chemical and
petrochemical markets were offset by decreased earnings on sales to the
oleochemical and polyolefin markets. Earnings from oleochemical markets were
lower due to higher fixed costs and absorption compared to the year ago period.
The second quarter acquisition of the catalyst business of Nanjing Chemical
Industry Corporation contributed modestly to operating earnings in the current
quarter. Results for the quarter were also negatively impacted by higher
SG&A spending of approximately $1 million, and higher raw material costs
compared with the same period last year.
Appearance
and Performance Technologies
The
Appearance and Performance Technologies segment provides pigments, effect
materials, personal care active ingredients and performance additives that
enable its customers to market enhanced image and functionality in their
products. This segment serves a broad array of end markets, including cosmetics
and personal care, coatings, plastics, automotive, construction and paper.
The
segment’s products help customers improve the look, functionality, performance
and overall cost of their products. In addition, the segment is the internal
supply source of precursors for most of the Company’s advanced
petroleum-refining catalysts.
Results
of Operations (in
millions)
|
|
Q3
2005
|
|
Q3
2004
|
|
%
change
|
|
Sales
|
|
$
|
188.2
|
|
$
|
172.2
|
|
|
9.3
|
%
|
Operating
earnings
|
|
|
17.0
|
|
|
19.3
|
|
|
-11.9
|
%
|
Discussion
Results
from this segment were down, as higher costs in operations serving the paper
and
effect materials markets more than offset the impact of higher revenues from
the
personal care actives, colors and specialty minerals markets.
Sales
from the Company’s mineral-based operations increased 1% in the third quarter of
2005 compared with the third quarter of 2004. This modest increase is due to
improved sales of kaolin-based products to non-paper specialty markets mostly
offset by lower volumes of kaolin-based products to the paper market. Lower
sales to the paper market were partially attributable to a continuing strike
in
Canada and some product rationalization, somewhat offset by higher prices.
The
Company has implemented price increases for mineral-based products in the
current year, and has seen some positive results. Overall, volumes to the paper
market were off approximately 10% versus the same quarter last year. The Company
continues to focus on non-paper kaolin markets to maximize cash flows
from these assets. These markets include plastics,
construction, automotive, agriculture, coatings and refining
catalysts.
Operating
earnings from mineral-based products decreased significantly in the third
quarter of 2005 compared with the same period of 2004. Increased sales of
kaolin-based products to specialty markets yielded flat results due to higher
manufacturing and distribution costs. Earnings from kaolin-based products to
the
paper market decreased as a result of higher natural gas prices of approximately
$2.5 million in the quarter. Natural gas prices, exacerbated by Hurricanes
Katrina and Rita, are expected to remain high for the remainder of 2005, and
will negatively impact these businesses by as much as $15 million for the full
year, despite a successful hedging strategy. Cash flows from kaolin-based
operations remain substantial, and these assets continue to be monitored with
respect to SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets.”
Sales
of
effect materials, colors and personal care actives collectively increased 19%
in
the third quarter of 2005 compared with the same period in 2004. Earlier in
the
year, the Company strengthened its position in the personal care market by
acquiring Coletica, S.A., a European company that develops performance-based,
skin-care compounds and related technologies. In 2004, the Company acquired
The
Collaborative Group, a domestic company serving similar markets. These
operations, along with previously existing operations, serve the cosmetics
and
personal care markets. The recent acquisitions, with third quarter sales
increases of $10.4 million, accounted for most of the increase in sales in
the
third quarter of 2005 compared with the third quarter of 2004, with the
remaining increase coming from sales of colorants. Colorant sales, which had
decreased earlier this year versus prior periods due to excess customer
inventory levels, have rebounded this quarter, but are expected to be below
last
year levels for the full year of 2005.
Operating
earnings from effect materials, colors and personal care actives increased
modestly in total in the third quarter of 2005 compared with the same period
in
2004, in relation to the increase in sales to these markets. Earnings from
the
above mentioned acquisitions along with increased sales of colorants were
partially offset by higher costs in operations serving the effect materials
markets. The combination of higher operating costs in the operations serving
the
effect materials markets and increased competition from Asian producers of
effect pigments has negatively impacted the Company’s margins and
volumes.
Materials
Services
The
Materials Services segment serves the Company’s technology segments, their
customers and others with precious and base metals and related services. This
is
a distribution and materials services business that purchases and sells precious
metals, base metals, other commodities and related products and services. It
does so under a variety of pricing and delivery arrangements structured to
meet
the logistical, financial and price-risk management requirements of the Company,
its customers and suppliers. Additionally, it offers the related services of
precious-metal refining and storage, and produces precious-metal salts and
solutions.
Results
of Operations (in
millions)
|
|
Q3
2005
|
|
Q3
2004
|
|
%
change
|
|
Sales
|
|
$
|
578.4
|
|
$
|
446.6
|
|
|
29.5
|
%
|
Operating
earnings
|
|
|
5.8
|
|
|
6.7
|
|
|
-13.4
|
%
|
Discussion
Sales
for
this segment include substantially all the Company’s sales of metals to
industrial customers of all segments. Sales also include fees invoiced for
services rendered (e.g.
refining
charges). Because of the logistical and hedging nature of much of this business
and the significant precious metal values included in both sales and cost of
sales, gross margins tend to be low in relation to the Company’s technology
segments, as does capital employed. This effect also dampens the gross margin
percentages of the Company as a whole, but improves the return on
investment.
While
many customers of the Company’s platinum-group-metal catalysts purchase the
metal from Materials Services, some choose to deliver metal from other sources
prior to manufacture. In such cases, precious
metal values are not included in sales. The mix of such
arrangements and extent of market price fluctuations can significantly affect
the reported level of sales and cost of sales. Consequently, there is no
necessary direct correlation between year-to-year changes in reported sales
and
operating earnings. The revenue increase in the third quarter of 2005 was due
to
higher prices and volumes of platinum group metals.
Earnings
from metal sourcing operations declined in the third quarter of 2005 compared
with the third quarter of 2004 due to lower base metal dealing results, but
remained at relatively high levels. Refining and related service operations
were
improved compared with the same period last year, as the Company’s domestic
refinery experienced improved volumes and operating efficiencies.
Comparison
of the First Nine Months of 2005 with the First Nine Months of
2004
Net
earnings from continuing operations increased to $181.3 million in the first
nine months of 2005 compared with $178.8 million in the same period of 2004.
Operating earnings increased to $221.0 million in the first nine months of
2005
compared with $213.6 million in the same period last year, primarily due to
higher earnings from the Materials Services segment, the Process Technologies
segment and the Environmental Technologies segment, partially offset by lower
earnings from the Appearance and Performance Technologies segment and higher
unallocated corporate and other expenses. Earnings from equity method joint
ventures increased to $24.2 million in the first nine months of 2005 compared
with $19.4 million in the same period last year, due to improved earnings from
the Company’s Asian joint ventures.
Environmental
Technologies
Results
of Operations (in
millions)
|
|
First
Nine Months 2005
|
|
First
Nine Months 2004
|
|
%
change
|
|
Sales
|
|
$
|
738.4
|
|
$
|
667.9
|
|
|
10.6
|
%
|
Operating
earnings
|
|
|
108.3
|
|
|
104.3
|
|
|
3.8
|
%
|
Discussion
Revenues
from mobile-source markets increased 10% in the first nine months of 2005
compared with the same period in 2004, as increased sales of light duty diesel
automotive applications outpaced decreased sales of domestic gasoline
applications. The majority of this increase was due to increased pass-through
substrate costs. Substrate costs were higher primarily due to increased demand
for catalyzed soot filters (CSF) to the light duty diesel market. Sales to
the
motorcycle, diesel OEM and the diesel retrofit markets increased in the first
nine months of 2005 compared with the same period last year.
Operating
earnings from mobile-source markets slightly decreased in the first nine months
of 2005 compared with the first nine months of 2004. Profits from automotive
markets were flat compared with last year, driven by the above-mentioned
decreased demand for gasoline applications, higher operating costs, absence
of
warranty accrual reversals in 2004 and an increase in the allowance for doubtful
accounts due to the bankruptcy of Delphi, offset by increased demand for light
duty diesel applications, higher royalty income and favorable impact from
foreign currency changes. Earnings from diesel OEM markets declined against
a
strong nine-month period last year, while earnings from the diesel retrofit
and
motorcycle markets improved.
Sales
to
industrial product markets increased in the first nine months of 2005 compared
with the first nine months of 2004. Sales to power-generation customers
increased in the period, but are not reflective of a market recovery. Sales
to
most other industrial markets were modestly higher compared with the same period
last year.
Operating
earnings from industrial product markets increased in the first nine months
of
2005 compared with the same period last year. Earnings from the power-generation
market improved versus the prior year, commensurate with the above-mentioned
increased sales. Earnings improved modestly from operations serving the
temperature-sensing market due to an acquisition completed in 2004.
Process
Technologies
Results
of Operations (in
millions)
|
|
First
Nine
Months
2005
|
|
First
Nine
Months
2004
|
|
%
change
|
|
Sales
|
|
$
|
487.6
|
|
$
|
439.2
|
|
|
11.0
|
%
|
Operating
earnings
|
|
|
65.6
|
|
|
60.1
|
|
|
9.2
|
%
|
Discussion
Sales
to
the petroleum-refining market increased in the first nine months of 2005
compared with the first nine months of 2004. This increase is largely due to
the
increase in demand for catalyst based on the Company’s DMS technology platform.
Sales for certain older product offerings declined in the period, while sales
of
additives increased. Operating earnings from products sold to petroleum-refining
markets increased in the first nine months of 2005 compared with the same period
of 2004, primarily due to the aforementioned increase in sales of DMS catalyst
products and additives. These improvements were offset by higher natural gas
costs of approximately $3 million and other raw material cost of approximately
$2 million.
Sales
of
catalysts to the chemical-process markets increased 14% in the first nine months
of 2005 compared with the same period last year. The increase in revenues came
from most served markets including the oleochemical, petrochemical and fine
chemical markets. Sales of approximately $6 million from the acquisition of
the
catalyst business of Nanjing Chemical Industry Corporation contributed to this
increase. Price increases initiated in 2004 and 2005 accounted for approximately
$4 million of higher revenues from the chemical-process markets. Operating
earnings from products sold to chemical-process markets increased in the first
nine months of 2005 compared with the first nine months of 2004 primarily due
to
absence of Tarragona start-up costs of $2.3 million in the first quarter last
year. Margins were negatively impacted due to the mix of products sold. Results
for the first nine months of 2005 were also negatively impacted by higher
SG&A spending of approximately $3 million, as well as higher raw material
costs compared with the same period last year.
Appearance
and Performance Technologies
Results
of Operations (in
millions)
|
|
First
Nine
Months
2005
|
|
First
Nine
Months
2004
|
|
%
change
|
|
Sales
|
|
$
|
548.7
|
|
$
|
523.7
|
|
|
4.8
|
%
|
Operating
earnings
|
|
|
55.5
|
|
|
58.1
|
|
|
-4.5
|
%
|
Discussion
Sales
from the Company’s mineral-based operations decreased 1% in the first nine
months of 2005 compared with the first nine months of 2004. This decrease is
due
to lower volumes of kaolin-based products to the paper market, partially offset
by an increase in sales of kaolin- and attapulgite-based products to specialty
markets. Lower sales to the paper market are partially attributable to industry
strikes in Finland in the second quarter of this year, as well as strikes in
Canada during the second and third quarters of this year, somewhat offset by
higher prices. Operating earnings from mineral-based products decreased
significantly in the first nine months of 2005 compared with the same period
of
2004. Despite increased sales of kaolin- and attapulgite-based products to
specialty markets, earnings decreased as a result of higher manufacturing and
distribution costs. Earnings from kaolin-based products to the paper market
decreased as a result of the aforementioned strike-related negative impact
on
volumes of approximately $3 million in the first nine months of 2005, as well
as
a negative impact from natural gas prices of approximately $7 million.
Sales
of
effect materials, colors and personal care actives increased 11% in the first
nine months of 2005 compared with the same period in 2004. The recent
acquisitions serving the personal care materials markets accounted for all
of
the increase in sales and were partially offset by decreased sales to other
served markets.
Operating earnings from personal care actives increased
in the
first nine months of 2005 compared with the first nine months of 2004, due
entirely to the above-mentioned acquisitions, partially offset by decreased
earnings from effect materials and colorants.
Materials
Services
Results
of Operations (in
millions)
|
|
First
Nine
Months
2005
|
|
First
Nine
Months
2004
|
|
%
change
|
|
Sales
|
|
$
|
1,501.5
|
|
$
|
1,453.6
|
|
|
3.3
|
%
|
Operating
earnings
|
|
|
16.7
|
|
|
13.4
|
|
|
24.6
|
%
|
Discussion
Revenues
in the first nine months of 2005 increased compared with the first half of
2004
due to higher prices of platinum group metals. Earnings from metal sourcing
operations improved in the first nine months of 2005 compared with the first
nine months of 2004. Refining and related service operations were improved
compared with the same period last year, as the Company’s domestic refinery
experienced improved volumes and operating efficiencies, partially offset by
higher administrative costs.
Liquidity
and Capital Resources
Liquidity
Working
capital was $447.7 million at September 30, 2005, compared with $655.5 million
at December 31, 2004. The current ratio was 1.3 and 1.7 at September 30, 2005
and December 31, 2004, respectively. This reflects the Company’s utilization of
existing cash balances to fund three acquisitions (see Note 3, “Acquisitions”).
Also impacting the current ratio are corresponding increases in the Company’s
committed metal positions and hedged metal obligations, and an increase in
the
working capital requirements of the Company’s Environmental Technologies (ET)
segment. The overall working capital of the Company’s technology segments
(Environmental Technologies, Process Technologies and Appearance and Performance
Technologies) is not subject to significant fluctuations from period to period;
however, in the current year, ET has experienced a fundamental increase in
working capital employed. This increase is due to ET’s recent market penetration
into catalyzed soot filter technology for light duty diesel applications to
the
mobile-source environmental markets (see Environmental Technologies section
for
further discussion). This trend is expected to continue, and will negatively
impact net cash provided by operating activities through 2006. The working
capital of the Materials Services segment may vary due to the timing of metal
contracts, but is monitored closely by senior management. In the recent period,
committed metal positions and hedged metal obligations have increased due to
the
effects of higher prices and usage as well as a shift in the mix of metals.
The
current levels are expected to continue. While long-term working capital
requirements cannot be readily predicted, it is expected that they will grow
proportionally with the revenues of the technology segments.
Cash
balances were $29.5 million and $126.2 million at September 30, 2005 and
December 31, 2004, respectively. The majority of this cash is held by foreign
subsidiaries. Where economically feasible, the Company finances its foreign
subsidiaries locally. The Company maintains cash pooling systems among certain
foreign operations, most notably in Europe, that allow for effective
inter-subsidiary financing.
On
March
7, 2005, the Company replaced existing committed credit facilities with a new
$800 million, five-year committed credit facility. This facility is available
for general corporate purposes, including, without limitation, to provide
liquidity support for the issuance of commercial paper and acquisition
financing. As of September 30, 2005, the Company had $77.0 million of commercial
paper outstanding, all of which matured on October 1, 2005.
In
May
2005, the Company entered into a five-year committed credit facility for
approximately $33 million (270 million Chinese Renminbi) with three major
foreign banks. The facility is available for general corporate
purposes for various subsidiaries within China. In
addition, the Company has a $12 million, seven-year committed credit facility
with two major foreign banks that expires in October 2010 related to a plant
expansion in China.
On
August
12, 2005, the Company issued a third tranche of Japanese yen 5.5 billion notes
(approximately $50 million) bearing a coupon of 0.75% in the private placement
market. In addition to the low coupon rate, these notes serve as an effective
net investment hedge of a portion of the Company’s yen-denominated
investments.
Early
in
the fourth quarter of 2005, the Company entered into a cross-currency swap
with
a notional amount of $150 million. This transaction effectively swaps the
Company’s US dollar floating rate exposure for a euro floating rate exposure.
The notional euro amount has been designated as a net investment hedge of a
portion of the Company’s euro-denominated investments.
The
Company’s total debt increased to $645.2 million at September 30, 2005 from
$525.7 million at December 31, 2004 due to acquisitions, higher working capital
requirements and a voluntary pension contribution. The percentage of total
debt
to total capitalization was 31% at September 30, 2005 compared with 27% at
December 31, 2004.
The
Company maintains a shelf registration of $450 million to facilitate the
Company’s ability to raise cash for general corporate purposes. The Company
maintains investment-grade credit ratings that it considers important for
cost-effective and ready access to the capital markets. Should the Company’s
rating drop below investment grade, the Company would experience higher capital
costs and may incur difficulty in procuring metals.
The
Company’s available cash and unused committed credit lines represent a measure
of the Company’s short-term liquidity position. The Company believes that its
short-term liquidity position is sufficient to meet the cash requirements of
the
Company. In addition to the short-term liquidity, the Company’s investment grade
rating, $450 million shelf registration and access to debt and equity markets
are sufficient to meet the long-term liquidity requirements of the
Company.
Capital
Resources
The
Company’s technology segments represent the most significant internal capital
resource of the Company. The Company’s technology segments contain businesses
that generate significant cash flow. Cash flows from the Materials Services
segment tend to fluctuate from period to period due to the timing of metal
contracts. The “All Other” category includes certain small manufacturing
operations, the Strategic Technologies group and other corporate functions,
which collectively use cash. The Strategic Technologies group develops
technologies to commercial levels to generate future sources of cash.
Net
cash
provided by operating activities was $136.9 million in the first nine months
of
2005 compared with $169.9 million in the first nine months of 2004. In the
current quarter, the Company voluntarily contributed $50 million to its domestic
pension plans in response to current economic factors. Other variances in cash
flows from operating activities occurred in the Materials Services segment
and
reflect changes in metal positions used to facilitate requirements of the
Company, its metal customers and suppliers (see Note 15 “Supplemental
Information,” for Material Services variations). Current levels of hedged metal
obligations and committed metal positions are expected to prevail for the
remainder of the year. Materials Services routinely enters into a variety of
arrangements for the sourcing of metals. Generally, transactions are hedged
on a
daily basis. Hedging is accomplished primarily through forward, future and
option contracts. However, in closely monitored situations for which exposure
levels have been set by senior management, the Company, from time to time,
holds
large unhedged industrial commodity positions that are subject to future market
price fluctuations. These positions are included in committed metal positions,
along with hedged metal holdings. The bulk of hedged metal obligations represent
spot short positions. Other than in closely monitored situations, these
positions are hedged through forward purchases. Unless a forward counterparty
fails to perform, there is no price risk for these transactions. In addition,
the aggregate fair value of derivatives in a loss position is reported in hedged
metal obligations (derivatives in a gain position are included in committed
metal positions). Materials Services works to ensure that the Company and its
customers have an uninterrupted source of metals, primarily platinum group
metals, utilizing supply contracts and commodities markets around the world.
Committed metal positions may include significant advances made for the purchase
of precious metals that have been delivered to the Company but for which the
final purchase price has not yet been determined.
The
Company’s joint ventures operate independently of additional Company financing.
These joint ventures returned $10.8 million of cash to the Company in the first
nine months of 2005. The Company does not anticipate significant additional
cash
proceeds from its joint ventures in 2005.
The
Company also depends upon access to debt and equity markets, as discussed in
the
liquidity section, as a source of cash.
The
Company continues to invest currently to develop future sources of cash through
self-investment, alliances, licensing agreements and acquisition. Notably,
during the first nine months of 2005, the Company invested $85.3 million in
capital projects and $159.3 million in acquisitions and other investments.
Capital expenditures for 2005 are expected to be approximately $120 million
to
$140 million. Acquisitions during the first nine months of 2005 included
approximately $70 million, net of cash acquired, for the acquisition of
Coletica, S.A. and related holdings (see Note 3 - “Acquisitions”). In the second
quarter of 2005 the Company acquired the catalyst business of Nanjing Chemical
Industry Corporation (NCIC) for approximately $20 million (see Note 3 -
“Acquisitions”). The Company has paid $14 million of this to date, and expects
to pay the remaining $6 million due to the former owners of NCIC within the
next
12 months. In the third quarter of 2005, the Company acquired Almatis AC, Inc.
for a total purchase price of $65 million (see Note 3 - “Acquisitions”). The
Company actively pursues investment opportunities that meet risk and return
criteria set by senior management. The Company expects to find opportunities
in
the future and will act upon these opportunities accordingly.
If
sources of cash exceed opportunities for investment, the Company will return
value to the shareholders. This is done through share buy-back programs,
dividends and debt repayment. In the first nine months of 2005 the Company
purchased approximately 2.8 million outstanding shares of common stock, net
of
stock options exercised. In May 2005, the Company’s Board of Directors
authorized a share repurchase program of 6 million shares. In addition, the
Company’s Board of Directors approved an increase in the quarterly dividend from
$0.11 per share to $0.12 per share in the first quarter of 2005. The Company
expects to find future investment opportunities, and will be able to reduce
the
future amount of shares purchased when this occurs.
Forward-Looking
Statements
This
document contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements relate to analyses
and other information that are based on forecasts of future results and
estimates of amounts not yet determinable. These statements also relate to
future prospects, developments and business strategies. These forward-looking
statements are identified by their use of terms and phrases such as
“anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,”
“predict,” “project,” “will” and similar terms and phrases, including references
to assumptions. These forward-looking statements involve risks and
uncertainties, internal and external, that may cause the Company’s actual future
activities and results of operations to be materially different from those
suggested or described in this document.
Internal
risks and uncertainties that could cause actual results to differ materially
and
negatively impact the Company include:
|
·
|
The
Company’s ability to achieve and execute internal business
plans.
The Company is engaged in growth and productivity initiatives in
all
technology segments, led by the Strategic Technologies group. Failure
to
commercialize proprietary and other technologies or to acquire businesses
or licensing agreements to serve targeted markets would negatively
impact
the Company.
|
|
·
|
Future
divestitures and restructurings.
The Company may experience changes in market conditions that cause
the
Company to consider divesting or restructuring operations, which
could
impact future earnings.
|
|
·
|
The
success of research and development activities and the speed with
which
regulatory authorizations and product launches may be
achieved.
The Company’s future cash flows depend upon the creation, acquisition and
commercialization of new
technologies.
|
|
·
|
Manufacturing
difficulties, property loss, or casualty loss.
Although the Company maintains business interruption insurance, the
Company is dependent upon the operating success of its manufacturing
facilities, and does not maintain redundant capacity. Failure of
these
manufacturing facilities would cause short-term profitability losses
and
could damage customer relations in the
long-term.
|
|
·
|
Capacity
constraints. Some
of the Company’s businesses operate near current capacity levels, notably
operations serving the petroleum refining operations. Should demand
for
certain products increase, the Company would experience short-term
difficulty meeting the increased demand, hindering growth
opportunities.
|
|
·
|
Product
quality deficiencies. The
Company’s products are generally sold based upon specifications agreed
upon with our customers. Failure to meet these specifications could
negatively impact the Company.
|
|
·
|
The
impact of physical inventory losses, particularly with regard to
precious
and base metals.
Although the Company maintains property and casualty insurance, the
Company holds large physical quantities of precious and base metals,
often
for the account of third parties. These quantities are subject to
loss by
theft and manufacturing
inefficiency.
|
|
·
|
Litigation
and legal claims. The
Company is currently engaged in various legal disputes. Unfavorable
resolution of these disputes would negatively impact the Company.
Still
unidentified future legal claims could also negatively impact the
Company.
|
|
·
|
Contingencies
related to actual or alleged environmental contamination to which
the
Company may be a party (see
Note 21, “Environmental Costs,” of the Company’s 2004 Form 10-K, as well
as the section above).
|
|
·
|
Exposure
to product liability lawsuits.
As
a manufacturer, the Company is subject to end user product liability
litigation associated with the Company’s products.
|
External
risks, uncertainties and changes in market conditions that could cause actual
results to differ materially and negatively impact the Company
include:
|
·
|
Competitive
pricing or product development activities affecting demand for our
products.
The Company operates in a number of markets where overcapacity, low
priced
foreign competitors, and other factors create a situation where
competitors compete for business by reducing their prices, notably
the
kaolin to paper market, some effect pigments markets, the colorant
market,
certain chemical process markets and certain components of the
mobile-source environmental markets.
|
|
·
|
Overall
demand for the Company’s products, which is dependent on the demand for
our customers’ products.
As
a supplier of materials to other manufacturers, the Company is dependent
upon the markets for its customers’ products. Notably, some North American
automobile producers have recently experienced financial difficulties
and
decreased product demand. Additionally, technological advances by
direct
and not-in-kind competitors could render the Company’s current products
obsolete.
|
|
·
|
Changes
in the solvency and liquidity of our customers.
Although the Company believes it has adequate credit policies, the
creditworthiness of customers could change. Certain customers of
the
Company, who supply parts to the North American automobile producers,
have
recently experienced financial difficulties, and bankruptcy of these
customers remains a threat. These customers represent a substantial
portion of the Environmental Technologies segment’s business. The Company
actively establishes and monitors credit limits to all
customers.
|
|
·
|
Fluctuations
in the supply and prices of precious and base metals and fluctuations
in
the relationships between forward prices to spot prices.
The Company depends upon a reliable source of precious metals, used
in the
manufacture of its products, for itself and its customers. These
precious
metals are sourced from a limited number of suppliers. Decrease in
the
availability of these precious metals could impact the profitability
of
the Company.
|
|
·
|
A
decrease in the availability or an increase in the cost of energy,
notably
natural gas. The
Company consumes more than 11 million MMBTUs of natural gas annually.
Compared with other sources of energy, natural gas is subject to
volatility in availability and price, due to transportation, processing
and storage requirements. Recent hurricanes impacting the Gulf Coast
have
driven up natural gas prices and availability. A prolonged continuation
of
these higher prices, absent the ability to recover these costs via
price
increases or energy surcharges, will negatively impact the Company.
Changes could include customer and product rationalization, plant
closures
and asset impairments, particularly in certain minerals operations
serving
the paper market.
|
|
·
|
The
availability and price of rare earth compounds.
The Company uses certain rare earth compounds, produced in limited
locations worldwide.
|
|
·
|
The
availability and price of other raw materials.
The Company’s products contain a broad array of raw materials for which
increases in price or decreases in availability could negatively
impact
the Company.
|
|
·
|
The
impact of increased employee benefit costs and/or the resultant impact
on
employee relations and human resources.
The Company employs approximately 7,000 employees worldwide and is
subject
to recent adverse trends in benefit costs, notably pension and medical
benefits.
|
|
·
|
Higher
interest rates.
A
portion of the Company’s debt is exposed to short-term interest rate
fluctuations. An increase in long-term debt rates would impact the
Company
when the current long-term debt instruments mature, or if the Company
requires additional long-term debt.
|
|
·
|
Changes
in foreign currency exchange rates.
The Company regularly enters into transactions denominated in foreign
currencies, and accordingly is exposed to changes in foreign currency
exchange rates. The Company’s policy is to hedge the risks associated with
monetary assets and liabilities resulting from these transactions.
Additionally, the Company has significant foreign currency investments
and
earnings, which are subject to changes in foreign currency exchange
rates
upon translation into U.S. dollars.
|
|
·
|
Geographic
expansions not developing as anticipated.
The Company expects markets in Asia to fuel growth for many served
markets. China’s expected growth exceeds that of most developed countries,
and failure of that growth to materialize would negatively impact
the
Company.
|
|
·
|
Economic
downturns and inflation.
The diversity of the Company’s markets has substantially insulated the
Company’s profitability from economic downturns in recent years. The
Company is exposed to overall economic conditions. Recent inflationary
pressures have resulted in higher material costs. The inability of
the
Company to pass these higher costs to customers via price increases
and
surcharges would have a negative impact on the Company.
|
|
·
|
Increased
levels of worldwide political instability, as the Company operates
primarily in the United States, the European community, Asia, the
Russian
Federation, South Africa and Brazil.
Much of the Company’s identified growth prospects are foreign markets. As
such, the Company expects continued foreign investment and, therefore,
increased exposure to foreign political instability. Additionally,
the
worldwide threat of terrorism can directly and indirectly impact
the
Company’s foreign and domestic
profitability.
|
|
·
|
The
impact of the repeal of the U.S. export sales tax incentive and the
enactment of the American
Jobs Creation Act of 2004.
The Company has decided not to repatriate any amounts from its foreign
subsidiaries at a reduced tax rate under the Act due to its intention
to
increase its investments outside of the United
States.
|
|
·
|
Government
legislation and/or regulation particularly on environmental and taxation
matters.
The Company maintains manufacturing facilities and, as a result,
is
subject to environmental laws. The Company will be impacted by changes
in
these laws. The Company operates in tax jurisdictions throughout
the
world, and, as a result, is subject to changes in tax laws, notably
in the
United States, the United Kingdom, Germany, the Netherlands, Italy,
Switzerland, France, Spain, South Africa, Brazil, Mexico, China,
Korea,
Japan, India and Thailand.
|
|
·
|
A
slowdown in the expected rate of environmental
requirements.
The Company’s Environmental Technologies segment’s customers, and to a
lesser extent, the Process Technologies segment’s customers, are generally
driven by increasingly stringent environmental regulations. A slowdown
or
repeal of regulations could negatively impact the
Company.
|
|
·
|
The
impact of natural disasters. Natural
disasters causing damage to the Company and our customers and suppliers
would negatively impact the Company.
|
Investors
are cautioned not to place undue reliance upon these forward-looking statements,
which speak only as of their dates. The Company disclaims any obligation to
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
Item
3. |
Quantitative
and Qualitative Disclosures about Market
Risk
|
Market
Risk Sensitive Transactions
The
Company is exposed to market risks arising from adverse changes in interest
rates, foreign currency exchange rates and commodity prices. In the normal
course of business, the Company uses a variety of techniques and instruments,
including derivatives, as part of its overall risk-management strategy. The
Company enters into derivative agreements with a diverse group of major
financial and other institutions with individually determined credit limits
to
reduce exposure to the risk of nonperformance by counterparties.
A
discussion and analysis of the Company’s market risk is included in Item 7A.
‘Quantitave and Qualitative Disclosures About Market Risk,’ Note 2 ‘Derivatives
and Hedging’ and Note 11 ‘Committed Metal Positions and Hedged Metal
Obligations’ of the Company’s 2004 Form 10-K. There have been no significant
changes to these market risks as of September 30, 2005. For more information
on
the Company’s market risk, please see Item 2. ‘Management’s Discussion and
Analysis of Financial Condition and Results of Operations,’ Note 8 ‘Derivatives
and Hedging’ and Note 11 ‘Committed Metal Positions and Hedged Metal
Obligations.’
Item
4.
|
Controls
and Procedures
|
The
Company carried out an evaluation, under the supervision and with the
participation of the Company’s management, including the Company’s Chief
Executive Officer and Chief Financial Officer, as of September 30, 2005, of
the
effectiveness of the design and operation of the Company’s disclosure controls
and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that the
Company’s disclosure controls and procedures as of September 30, 2005 were
effective to provide reasonable assurance that material information related
to
the Company (including its consolidated subsidiaries) required to be included
in
the Company’s periodic SEC filings would be communicated to them on a timely
basis. There was no change in the Company’s internal control over financial
reporting during the Company’s third fiscal quarter of 2005 that has materially
affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting.
The
Company’s management, including the Chief Executive Officer and Chief Financial
Officer, do not expect that our disclosure controls or our internal control
over
financial reporting will prevent all errors and all fraud. A control system,
no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Company have been detected. These inherent
limitations include the reality that judgments and estimates can be faulty,
and
that breakdowns can occur because of simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some persons or by
collusion of two or more people. The design of any system of controls also
is
based, in part, upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Because of the inherent
limitations in a cost-effective control system, misstatements due to error
or
fraud may occur and not be detected. Accordingly, the Company’s disclosure
controls and procedures are designed to provide reasonable, not absolute,
assurance that the objectives of the Company’s disclosure control system are met
and, as set forth above, the Company’s Chief Executive Officer and Chief
Financial Officer have concluded, based on their evaluation as of September
30,
2005, that the Company’s disclosure controls and procedures were effective to
provide reasonable assurance that the objectives of the Company’s disclosure
control system were met.
PART
II - OTHER INFORMATION
Item
2.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
(e)
|
The
Company has Board authorized programs for the repurchase of the Company’s
stock. The following table represents repurchases under these programs
for
each of the three months of the quarter ended September 30,
2005:
|
ISSUER
PURCHASES OF EQUITY SECURITIES:
Period
|
|
Total
Number of
Shares
Purchased
|
|
Average
Price
Paid
per
Share
|
|
Total
Number of Shares Purchased
as Part of Publicly
Announced Plans or
Programs
|
|
Maximum
Number of Shares
that May Yet Be Purchased
Under the Plans
or Programs (a)
|
|
7/1/05
- 7/31/05
|
|
|
10,000
|
(b)
|
$
|
28.13
|
|
|
10,000
|
|
|
6,059,532
|
|
8/1/05
- 8/31/05
|
|
|
241,700
|
|
|
28.19
|
|
|
241,700
|
|
|
5,817,832
|
|
9/1/05
- 9/30/05
|
|
|
48,300
|
|
|
28.30
|
|
|
48,300
|
|
|
5,769,532
|
|
Total
|
|
|
300,000
|
|
$
|
28.21
|
|
|
300,000
|
|
|
|
|
|
(a)
|
Share
repurchase program of 6 million shares authorized in October 2003
and the
share repurchase program of 6 million shares authorized by the
Board of
Directors in May 2005.
|
|
(b)
|
Excludes
337 shares obtained through dividend reinvestment by the Rabbi Trust
under
the Deferred Compensation Plan for Key Employees of Engelhard
Corporation.
|
|
|
Pages
|
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Executive
Officer.
|
38
|
|
|
|
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Financial
Officer.
|
39
|
|
|
|
|
Section
1350 Certifications of Chief Executive Officer and Chief Financial
Officer. *
|
40
|
*
This
certification accompanies this Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for
purposes of Section 18 or any other provision of the Securities Exchange Act
of
1934, as amended.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
|
ENGELHARD
CORPORATION
|
|
|
|
(Registrant)
|
|
|
|
|
|
|
|
|
|
|
|
|
Date:
|
November
8, 2005
|
|
/s/
Barry W. Perry
|
|
|
|
Barry
W. Perry
|
|
|
|
Chairman
and Chief
|
|
|
|
Executive
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
Date:
|
November
8, 2005
|
|
/s/
Michael A. Sperduto
|
|
|
|
Michael
A. Sperduto
|
|
|
|
Vice
President and Chief
|
|
|
|
Financial
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
Date:
|
November
8, 2005
|
|
/s/
Alan J. Shaw
|
|
|
|
Alan
J. Shaw
|
|
|
|
Controller
|